First-Time Fund Managers: Strategies for Overcoming Challenges and Seizing Opportunities in a Downturn

First-Time Fund Managers: Strategies for Overcoming Challenges and Seizing Opportunities in a Downturn.

Navigating the Challenges of Raising a First-Time Fund Amidst Economic Downturn

Introduction

The global economic landscape has been experiencing significant turbulence in recent years, with both advanced economies and emerging market economies in recession for the first time since the Great Depression (Apr 14, 2020). This economic downturn has presented a myriad of challenges for venture capitalists and fund managers, particularly those attempting to raise a first-time fund. With investors growing increasingly cautious about where they allocate their capital, startup fundraising and venture capital (VC) fundraising have experienced a slowdown.

This article will explore the challenges facing first-time fund managers during an economic downturn, as well as the strategies they can employ to maximize their chances of securing investments. We will also discuss the potential rewards associated with successfully navigating the process of raising a first-time fund in the midst of a recession.

Challenges Facing First-Time Fund Managers

During economic downturns, limited partners (LPs) often gravitate towards fund managers with a proven track record, making it more difficult for first-time fund managers to secure investments (Dec 17, 2021). In the current market, the riskiest investments are often considered to be those made by emerging managers who lack an extensive track record. This heightened risk aversion among investors has made it increasingly difficult for first-time fund managers to attract capital.

Strategies to Overcome Challenges

To navigate this challenging landscape, first-time fund managers have had to adopt various strategies to maximize their chances of securing investments. These strategies include:

Conducting extensive research and outreach to potential LPs: First-time fund managers must identify potential investors who may be interested in their specific investment thesis and target market. This requires thorough research and a strong understanding of the investment landscape.

Obtaining warm introductions through existing connections: Networking is crucial for first-time fund managers, as it can help secure warm introductions to potential investors. By leveraging their existing connections, fund managers can increase the likelihood of securing meetings with LPs and presenting their investment thesis.

Attending conferences and events to meet potential investors in person: In-person meetings can significantly improve a fund manager's chances of securing investments, as they provide an opportunity to establish rapport and discuss their value proposition more in-depth. Conferences and events also offer valuable networking opportunities, enabling fund managers to expand their network and gain valuable insights into the investment landscape.

Potential Rewards of Raising a First-Time Fund

Despite the difficulties associated with raising a first-time fund, it's important to note that these funds can often generate strong returns. According to a 2021 Pitchbook report, 27% of first-time funds generated top-quartile returns, compared to 20% of non-first-time funds (Nov 16, 2022). However, during times of economic uncertainty, this data may not be enough to secure the necessary commitments from investors.

In his 1997 State of the Union address, President Clinton announced his plan to balance the budget for the first time in 27 years (Dec 17, 2021). This serves as a reminder that economic conditions can change over time, and those who successfully navigate the process of raising a first-time fund during a downturn may be well-positioned to capitalize on future opportunities.

Conclusion

Raising a first-time fund during a downturn is an uphill battle that requires persistence, networking, and a strong value proposition. First-time fund managers must be prepared to face rejections and uncertainties while striving to secure the capital needed to support their investments. Despite the challenges, those who successfully navigate this process and establish a track record of success have the potential to deliver strong returns for their investors.

As the global economic landscape continues to shift, it's crucial that first-time fund managers remain agile and adaptable, leveraging the strategies outlined above to maximize their chances of success. By doing so, they can not only weather the storm of an economic downturn but also position themselves to seize opportunities as the market recovers.

Corey Singleton

Lead Director North America?

VCengine

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