The venture capital landscape in the United States is undergoing a significant shift. According to data compiled by PitchBook, venture firms in the US raised $150.9 billion across 593 funds in the first three quarters of this year. While this represents an increase from the $147.2 billion raised in 2021, it marks a staggering drop from the 1,139 funds closed last year.
The Rise of Legacy Firms
A significant portion of these dollars went into legacy or well-established firms, which have the clout to raise mega-funds. These firms have a proven track record and are often backed by large institutional investors, making it easier for them to secure funding. However, this has led to a situation where smaller, newer funds are finding it increasingly difficult to raise capital.
The Decline of Emerging Ecosystems
Consequently, LPs (Limited Partners) are not as interested in backing firms outside of the established venture hubs this year. This marks an unfortunate reversal to the COVID-induced trend of more venture money making its way to emerging ecosystems. The data shows that 77% of capital has been raised in just California and New York, with those states raising 68% of the year’s totals.
A Shift Towards Concentration
The data also highlights a shift towards concentration in the venture capital industry. Through Q3, California and New York were two of only 12 states (including Washington, D.C.) that have seen higher fundraising this year than last. In addition, they are two of only five states that have already set new yearly fundraising records in 2022. The other three states are Tennessee, Georgia, and Florida, which shows that the Southeast seems to be an outlier in some of these decreasing trends.
The Midwest: A Case Study
In July, I wrote about how it seemed LPs were abandoning the Midwest specifically. At the time, I noted this didn’t make sense because many of those firms back local companies, which would likely experience a softer landing as valuations came back down to earth. However, now with an additional quarter of data, it seems that it isn’t just a Midwest problem; most funds outside of the two largest startup hubs – San Francisco and New York – are feeling the frost from potential LPs.
SpringTime Ventures: A Sector-Specific Fund
One notable exception is SpringTime Ventures, a sector-specific fund focused on biotech. The fund has raised over $100 million in commitments, indicating that there is still interest in backing specialized funds. However, this doesn’t bode well for generalists or emerging fund managers located outside the top two venture markets.
A Damaging Ripple Effect
If this trend continues, it could have a damaging ripple effect on these emerging tech hubs and entrepreneurs who were just starting to build momentum. The narrative needs to change once the knife really starts to fall on valuations, and smaller funds need to find ways to differentiate themselves and secure funding.
Conclusion
The venture capital landscape in the United States is undergoing significant changes. With larger firms dominating the fundraising scene, emerging ecosystems are struggling to attract investment. Smaller funds need to adapt quickly to survive in this new environment. It’s essential for these firms to develop a unique value proposition and find innovative ways to secure funding.
Recommendations
- Develop a Unique Value Proposition: Smaller funds must differentiate themselves from larger firms by developing a unique value proposition.
- Foster Strong Relationships with LPs: Building strong relationships with LPs is crucial in today’s competitive fundraising environment.
- Diversify Your Portfolio: A diversified portfolio can help smaller funds mitigate risks and increase their chances of success.
By understanding the shifting landscape and adapting to these changes, smaller firms can survive and thrive in this new environment.
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