The entire tech ecosystem is adjusting to a new reality in 2023.

Dealmaking is down. The rate of investment activity on AngelList, a proxy for the broader market, was the lowest they’ve ever measured. VC-backed companies recorded only $5.8B in exits during Q1 this year, less than 1% of the exit value generated in 2021, building up pressure within the ecosystem.

As is VC fundraising. 2023 is on pace to have the lowest fundraising total since 2017. Things are especially difficult for emerging fund managers with commitments concentrated in larger-size vehicles. LPs are moving to risk-off in VC, passing on emerging managers in favor of established managers.

While there is credible data available on activity in the tech ecosystem overall (check out AngelList State of U.S. Early-Stage Venture: Q1 ‘23 report), there is a lack of data focused on the emerging fund manager experience. So, we crowdsourced input from the Signature Block audience.

Over 195 emerging managers* responded to our survey, resulting in over 5,000 data points on:

• Backgrounds and experiences: Previous investing experience, operating experience, etc.
• Fundraising: Target fund sizes, time to close, fundraising experience, etc.
• Fund strategy: Investment focus, brand building, community approach, etc.
• Market observations: Valuations, deal flow volume, overhyped and under-hyped spaces, etc.
  

If you only have a few minutes, here’s a summary of our key findings:

• It’s a difficult time to raise a fund. 91% of fund managers reported that it was difficult or very difficult to close their fund with a majority raising for more than 6 months.
• Most emerging managers are “breaking out” of existing firms, furthering the rise of the individual brand in VC. That said, solo GP funds are less common than it may seem.
• There is increased specialization in venture with more emerging managers now identifying themselves as specialists than generalists.  
• While there has been an explosion of investment activity in AI/ML, emerging managers ranked it as the most overhyped space currently. They ranked longevity as the most under-hyped space.

*We qualify emerging managers as those raising or have closed their first or second fund.

Our Findings

Here are some of the most interesting findings from the emerging managers surveyed.

Background and experiences

63% are current or former founders.

Following the rise of operator angels, we’re seeing the rise of operator fund managers. Founding a company builds a network that unlocks access to deals and LP capital. It also provides unique perspective and credibility into specific domains that can help these managers see and win deals. This trend is also driven by infrastructure such as AngelList which makes starting and managing a venture fund more accessible and cheaper.

Note: Investors were able to select multiple options for this question.

73% are “breaking out” of existing VC firms.

The majority of emerging managers left another firm to start their own, furthering the rise of the individual brand in VC. Of those that “broke out”:

• 20.5% were a GP
• 16.9% were a partner (non-GP)
• 35.4% held a non-partner investing role

Notes:

• Investors were able to select multiple options for this question.
• We specifically asked respondents not to include their current role in their responses.

Fundraising

91% found fundraising difficult or very difficult.

Fund managers are also feeling the effects of the generally depressed fundraising environment. But, most expected it. 73% of fund managers expected the level of difficulty they faced before they started raising.

32% decreased their target fund size.

This was lower than we expected considering how difficult it has become to raise from LPs. The majority are persisting with their fund size target and some even increased it.

85% took more than 6 months to close their recent funds. 52% took more than 12 months.

The slowdown in market activity is extending fundraising cycles. Of fund managers who are currently raising, 52% started raising more than 6+ months ago.

One fund manager shared this experience:

“Allocation with VC is low currently and we've had multiple long DD sessions with LPs only for them to go silent or walk away late on due to market conditions or bandwidth challenges - we need quicker decisions, even if its a no.”

2%+ GP commit isn’t necessarily required. 27.5% committed 1% or less.

Traditionally GPs were expected to commit 2% or more of the total amount raised. This isn’t always required by LPs and difficult for many emerging managers to afford.

43% aren’t currently raising and don’t plan to within the next 12 months.

This could be a result of fund managers deploying slower than expected or trying to extend their funds to weather this difficult fundraising cycle.

Fund strategy

Only 26% are solo GPs while the remaining have partnered with another GP or plan to.

Solo GP funds are less common than they may seem. We expect to see more GPs teaming up in this difficult fundraising cycle. 15% of Solo GPs are looking for one or more GPs to join them.

One fund manager shared:

“Being in my mid-20s, I teamed up with an experienced fund manager (5 funds, $500M AUM) who wanted exposure to sports and it drastically eased the process and created a mentor overnight.”

58% see themselves as specialist investors.

There is increased specialization in venture as competition increases. More fund managers see themselves as specialist investors focused on investing in one or a few specific sectors than generalists.

56% regularly create content to benefit their fund.

Many investors have built audiences that help them get access to differentiated deal flow. That said, the venture airwaves are only getting more crowded with the majority of fund managers regularly creating content. It’s never been more important for investors to deliver differentiated content.  

87% regularly post on LinkedIn, more than Twitter.

LinkedIn is the most popular medium for fund managers overall, but it might not be the right medium for everybody.

Note: Investors were able to select multiple options for this question.

From our post on How to get deal flow:

“Content comes in many forms: podcasting, tweeting, writing on Substack, short-form video on TikTok, long-form videos on YouTube, and more. Finding the right medium is important – some people are exceptional writers but terrible at live podcast interviews.”

69% invest in community building.

Venture Capital is relationship-driven.

From our post on How to get deal flow:

“Building, contributing to, and investing in communities can be an effective way to source opportunities. Communities put you in the flow of information and by their very nature, facilitates relationships and trust.”

Investors are most excited to invest in fintech and enterprise SaaS.

These spaces continue to be the “bread and butter” of venture investing. Despite the explosion of activity in AI and ML, it came in third.

Market observations

67% are seeing valuations decrease in Q1 '23 compared with the previous quarter.

This is supported by data in the AngelList State of U.S. Early-Stage Venture: 1Q23 report:

“Aside from pre-seed, average startup valuations declined at every fundraising stage relative to the previous quarter in 1Q23. Seed-stage valuations declined by 5.7% to $22.5M, Series A valuations declined by 14.1% to $66.6M, and Series B valuations declined by 2.5% to $220M. Pre-seed valuations increased by 1.9% to $10M.”

77% are seeing roughly the same or higher deal flow compared with the previous quarter.

While the majority of investors might be seeing similar or higher volumes of deal flow, fewer deals are getting done.

From the AngelList State of U.S. Early-Stage Venture: 1Q23 report:

“Only 6.1% of active startups on AngelList raised a round or exited in 1Q23, the lowest rate ever observed in our dataset. This rate of investment activity is a 1.3% decline from 4Q22’s rate of 7.4%, and a 5% decline from 1Q22’s rate of 11.6%.”

64% say their biggest challenge is raising from LPs.

This reiterates how difficult fund managers are finding it to raise in this market.

Note: Investors were able to select their top two options for this question.

Fund managers shared these observations with us anonymously:

“The hardest thing for an emerging manager is to find LPs that are willing to write USD 1-10m tickets for emerging managers in a fund 1 or 2.”

“I run a group of about 120 emerging managers. 30 had dinner together on Tuesday. Common themes: -struggling to get LPs, wondering what events they should be spending time at, 50% struggle with good deal flow, 50% unsure about how to navigate the current market overall.”

“Pay attention to which Emerging Managers are actively announcing new investments and which ones aren't. We are aware of many small firms that have essentially stopped new investments and are struggling to raise their next fund.”

68% say introductions to LPs would be most valuable right now.

This is expected given how difficult emerging managers are finding raising from LPs currently.

Fund managers shared these observations with us anonymously:

“Difficult to find the folks willing to allocate and then those who are willing to allocate to emerging managers are flooded with options.”

“Feels like there are a lot of emerging managers still raising which creates a lot of noise for LPs.”

“Very few institutional LPs really investing in emerging GPs + spreading the world that other should invest only in blue-chip funds with brand names.”

49% say AI and ML is the most overhyped space currently.

While there has been an explosion of investment activity in AI and ML, fund managers ranked it as the most overhyped space currently, followed by web3.  

From the AngelList State of U.S. Early-Stage Venture: 1Q23 report:

“One bright spot in tech amid the ongoing turmoil has been generative AI, which captured the second largest share of investment activity on the platform in 1Q23 (AI / ML was the 5th most active investment sector on AngelList in 2022). While Web3 has significantly less fanfare than it did this time last year, the sector still managed to capture the fourth highest share of deal volume in 1Q23, indicating resiliency during this prolonged ‘crypto winter.’”

Fund managers report longevity as the most under-hyped space, followed by biotech.

There have been a number of advancements in life-extending technology, improved diagnostics and anti-aging drugs driving attention for a subset of investors. That said, the distribution of responses varies widely.

Thanks to all of the managers that shared their experience in this report. It feels like there’s a real collaborative and cooperative energy among new fund managers, and we’re happy to support.

We started Signature Block nearly a year ago to crowdsource answers to a growing number of questions we received from emerging managers and friends that were considering starting a fund. Starting a fund has never been easy, and it’s become even harder more recently. But it wouldn’t be rewarding if it was easy, right? :)

About us  

At Weekend Fund, we write $200K-$400K checks into early-stage companies capitalizing on emerging consumer behaviour, technology and regulatory shifts. Our relatively small check size allows us to remain collaborative with other investors, and we’re always looking to build strong co-investor relationships.

If you’re an emerging fund manager, we’d love to hear from you. Drop us a line at ryan@weekend.fund or vedika@weekend.fund.

— Ryan and Vedika