Fundraising in a recession for emerging fund managers

Emerging fund managers face a unique challenge in fundraising in a recession. While many established firms can weather the storm and maintain their investor base, emerging managers often struggle convincing potential investors to commit Capital.

Here are the challenges emerging fund managers face when fundraising in a recession, and a few tips on overcoming them.

TLDR: Be conscious of the market dynamics. Know why your team, fund and strategy are unique. Find your tribe and warmly open the right doors with resilience.

There has never been a better time to fund emerging managers with 8 out of 12 years, our tribe delivering outperformance!

Find your tribe!

Join Family Office networks like TBLI Group , or PE & VC Associations like the LPEA - Luxembourg Private Equity & Venture Capital Association , or Asian Venture Capital Journal (AVCJ) . Join Communities of Practice like Global Women in VC , European Women in VC , or 2X Collaborative , hold yourself to account, and stress test your strategies daily, weekly and monthly. Get ready to be institutional-grade early and complete VC Accelerators like Coolwater Capital , VC Unlocked or Kauffman Fellows so you can operate at the top of your Emerging Manager license - and as Brad Feld always says, "Be Smarter than your lawyer" on the deal side and keep refreshing your knowledge with your team and complete education programs like Techstars Venture Deals, VentureESG , Equilo and others to be sure to execute as effective as your suppliers by asking the right questions.

Finally - building and raising a fund is the hardest thing I've ever done. There is truth in the notion that fundraising is a marathon and not a sprint, so connecting with fellow GPs living the same highs and lows can keep you sane, help you solve technical problems much faster, connect you to quality deal flow, human capital, and LPs, and tap into the trends and what is market-in-market.

and finally - keep having that contrarian perspective - investors should never waste the opportunity of a good recession and moving against the grain!

The current state of fundraising

It is no secret that fundraising is more difficult in a recession. Limited partners (LPs) are more cautious with their Capital and quickly pull back commitments to new or less established fund managers. As a result, emerging fund managers can find themselves needing help to raise the necessary capital to meet their target fundraising goals.

Nevertheless, we can do a few things as emerging fund managers to improve our chances of success in a recessionary fundraising environment.

1. Have a well-defined investment strategy - ensure it is based on sound market research and analysis. LPs are looking for clarity and confidence in the face of economic uncertainty, so your pitch should be able to articulate how your firm plans to generate returns despite challenging market conditions.
2. A cohesive Team - demonstrate how you are a solid and experienced team and what it is you have achieved together in the past. LPs want to know that you have the right people to execute your strategy successfully. Show your track record of deals, DD, turnarounds, and founder value add. They will also look for signs that your team has a good track record of working together effectively and contributing to your company's strategy - and the ecosystem.
3. Effective Allocation Strategy - EMs must have a solid plan for deploying the Capital they raise. LPs will want to see that you have a clear vision of how you will use their money to generate returns.

If you can demonstrate these things, you will be in a much better position to succeed in raising Capital during a recessionary period. While it may be more difficult than usual, it is still possible for emerging fund managers to find true believers. Savvy investors invest in people - not only the strategy. It's a marriage, not a date.

The effects of a recession on fundraising

A recession can have several effects on fundraising, making it more difficult for emerging fund managers to attract and retain investors.

1. Allocators become more Risk Averse - During a recession, investors may become more risk-averse and conservative with their investments.
2. Preference for Tried, Trusted and Tested - They may also be less likely to take on new investment opportunities, preferring to stick with tried-and-true investments that have performed well in the past with managers they know and trust.
3. Less Money Available - As allocators try to right-size their portfolios, as the public markets took massive hits, they are often over-allocated in the venture. With the losses on the public markets, there is less money available for investment overall. This delivers the current "Hunger Games" environment and can lead to increased competition for investment dollars among fund managers, further driving up the costs of raising Capital for all.

Finally, recessions can also lead to changes in investor behaviour. For example, investors may become more focused on short-term results and less interested in long-term growth potential. This shift in thinking can make it harder for emerging fund managers in long-only, less volatile strategies like deeptech to persuade investors to commit Capital to their funds, especially when talking 10+2 year terms.

The opportunity!

Despite the challenges that a recession can pose for fundraising, there are still opportunities for emerging fund managers to raise Capital successfully. Now is the ideal term for values-based investors and responsible Capital - a critical segment of the market if we want to overcome the challenges of the impacts of Climate Change.

Many investors also become increasingly interested in value-oriented investments during a recession. By positioning their funds accordingly, emerging fund managers can appeal to responsible investors, high net worths, and next gens, who are not only voting with their dollars but voting with their conscience, tapping into new sources of Capital.

Why emerging fund managers are struggling

Emerging fund managers struggle to raise money in the current economic climate for three primary reasons.

1. Reliance on Traditional sources of Capital - many emerging fund managers are still reliant on traditional sources of Capital, such as banks and institutional investors, which are themselves under pressure in the current environment - and typically are unlikely to fund a fund one due to the lack of governance infrastructure that needs to be in place to protect the downside operating risks. As a result, these traditional sources of Capital are often unavailable or highly limited for emerging fund managers.
2. Persistent Returns vs Outperformance - Investors are generally becoming more risk-averse and are allocating less Capital to new and unproven investment strategies. This is particularly true in the current climate of economic uncertainty, where investors seek proven investment strategies with a track record of delivering persistent returns. No one gets fired for hiring a Tier 1 - While it is true, Emerging Managers delivered 8 out of 12 years of outperformance in venture capital - Kauffman 2002-2016; no one gets fired for hiring a multi-billion dollar firm that provides "persistent" sub-par returns.

3. Working Capital is king - Fundraising is an inherently costly process, and many emerging fund managers need more resources to mount an effective fundraising campaign - and building that angel-style track record takes Personal Capital. In addition, many emerging fund managers need to be more experienced in fundraising techniques and approaches to increase their chances of a successful close.

Reigniting those fundraising efforts!

As Emerging fund managers, we are already feeling the pinch of the current recession, and in every conversation, players wonder how they will continue to raise money from investors. While it may seem challenging to raise money in a recession, there are still opportunities for emerging fund managers to raise Capital.

1. Seek out Family offices - Family offices are private wealth management firms that invest on behalf of wealthy families. They often have a more long-term perspective, chase multi-generational returns, and have more flexibility with their investment decisions than traditional institutional investors. They also may be more willing to invest in emerging managers during a recession.
2. Engage High Net Worth Individuals - These individuals may be more likely to invest in alternative investments during a downturn as they seek ways to protect their wealth.
3. Tap the fund of funds - there is enormous room right now for FoF to back emerging managers with three clear value propositions for them to do so: 1. signal in the noise on the managers - 2. rapid pipeline to direct investments for those that lack the technical skills - and 3. a vast opportunity to underwrite outsized returns - not only persistent returns to ride out the volatility in a long-only asset class! The challenge - Institutional want to carve out - but structurally have too much capital to deploy. A partnership with a trusted Fund of Funds allows them to meet the structural and governance needs of the firm while tapping into the signal behind the noise.

Be conscious of your capital - Pools of capital like those offered by the European Investment Fund (EIF) come with considerable ties and a considerable overhead for a first fund EM - It's at least 100K euros on additional admin costs and a world of time and effort on governance and oversight - when the average Emerging Manager fund is a 14m fund on the median and a 10m fund on the average and needs to show MVP - a performing team, a viable track record on the thesis and solid signal - to secure the fund three on the back of rapid deployment. The minimum viable fund size in Europe is also 50m at least (in Luxembourg) for an EIF allocation to make sense - and pragmatically, that is more likely a fund two than a fund one.

Finally, it is essential to remember that fundraising is a relationship business and a long-term process. People invest in people. Even in a recession, there will be opportunities to connect with potential investors and raise Capital. By planning your fundraising efforts carefully, you can weather the current economic conditions and emerge more relevant than ever.

Managing Investor Relationships

In the current economic climate, it is more important than ever for emerging fund managers to have a well-thought-out and executed investor relations strategy. By effectively managing relationships with current and potential investors, fund managers can ensure that they can raise the necessary capital to continue operations and achieve their long-term goals.

Some tips for managing investor relationships in a recession include:

1. Keep communication lines open - regular updates on the status of the fund and performance expectations will help keep investors informed and engaged.

2. Be honest about challenges - investors will appreciate honesty and transparency if any obstacles or setbacks impact performance.

3. Get creative with fundraising - look for new ways to raise Capital, such as rallying SPVs under management with Allocations or Vauban - or pursuing venture debt financing to underwrite that working capital. Platforms like Revere Ratings and Reviews that do the deep due diligence on the fund manager, SAGANA on the impact side - or Moonfare offer DD score-carding of the PE/Managers - giving the trusted signal in the noise for efficient allocation across a selective number of EMs.

By following these tips, as emerging fund managers, we can weather the storm of a recession and come out stronger on the other side.

Stand out from the crowd and find ways to connect authentically

The biggest challenge for LPs looking for outstanding emerging managers is sourcing and selection - with Carta Vauban from Carta and Allocations , becoming a VC is at the tip of anyone's fingertips if you have access to a laptop and some working nous. Finding ways to cut through the noise and be warmly referred to by decision-makers by trusted partners is critical.

1. Find your tribe and be warmly welcomed in

Investors are bombarded with requests for money, so it's essential to make your pitch stand out. Team up with other GPs in your segment so that when the investor needs to carve out 10M, and you can only take 2M, you have four other great emerging managers with a solid track record that can be warmly recommended.

2. Focus on your unique selling points

You can pull your deck apart page by page and question whether that truly captures the elements that distinguish your firm from every other firm. What makes your fund unique? What distinguishes you, your team, and your strategy from other managers? Could you communicate these selling points loudly and clearly to potential investors? These differentiators should be the cornerstone of your pitch.

3. Never, ever, ever give up - show resilience!

Here we must eat our advice. Just like our founders face challenges in market access - so too do we. One of the biggest challenges emerging fund managers face is simply maintaining motivation in the face of rejection - and showing your resilience. It's easy to get discouraged when potential investors say no, but it's important to remember that every no brings you closer to a yes. We must keep going and never give up.

Conclusion

In conclusion, fundraising in a recession can challenge every one of us as emerging fund managers. However, my mission is to prove that it is possible. Many strategies can be employed to increase our chances of success. The most important thing is to have a clear and compelling value proposition. If you can show potential investors why your team and strategy are worth backing even in tough economic times, you stand a much better chance of raising the Capital you need.

Here's to closing those 2023 Vintage funds!

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R3i Capital?LP has announced the launch of its Sustainable Development Future Fund, a US$20 million seed-stage venture capital fund. The 506(c) Delaware-based fund will provide financing to 60 startups worldwide whose deep technology innovations improve the resilience and effectiveness of smart cities’ interconnected systems: energy, water, transportation, the built environment, health, food and agriculture, and safety and security, meeting the requirements of SDG 3, 5, 7, 11, and 13. The team’s broader vision is to mobilize US$1B to impact the United Nations Sustainable Development Goals.

Leesa Soulodre is the General Partner of?R3i Capital?and the founder of the R3i Group. If you found this useful, like, share with another emerging manager or LP, and follow me on?LinkedIn?so that together we can accelerate impact.

R3i is on a mission to deploy one billion dollars over the next decade into deeptech climate impact and the transition to value-based care.?R3i Capital?LP has announced the launch of its Sustainable Development Future Fund. The 506(c) Delaware-based fund will provide financing to 60 startups worldwide whose deep technology innovations improve the resilience and effectiveness of smart cities’ interconnected systems: energy, water, transportation, the built environment, health, food and agriculture, and safety and security, meeting the requirements of our SDGs.

The fund targets 6 Sustainable Development Goals:

1. GOAL 3 — Good Health and Wellbeing: Ensure healthy lives and promote well-being for all at all ages
2. GOAL 5 — Achieve gender equality and empower all women and girls
3. GOAL 6 — Ensure availability and sustainable management of water and sanitation for all
4. GOAL 7. Ensure access to affordable, reliable, sustainable and modern energy for all
5. GOAL 11: Make cities and human settlements inclusive, safe, resilient and sustainable
6. GOAL 13. Take urgent action to combat climate change and its impacts

Only together, can we accelerate impact and build a more inclusive economy.

What’s in our name?

R3i stands for returns, resilience and reliability — three characteristics that are often used to describe or evaluate investments, businesses, or other assets.

Together, these three characteristics can be important factors to consider when evaluating the potential risks and rewards of an investment or asset.

3 i’s — “Intelligence, Innovation, Insight” are the three characteristics that are often used to describe a venture firm’s edge. R3i synthesises these into its collective and inclusive “impact”.

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