The formation of new venture capital funds is critical to the future of innovation. What does it take to become a venture capital investor? Emerging managers—teams raising their first venture capital funds—face myriad challenges in the process of getting their first funds off the ground. Which limited partners should Emerging Managers target? What are the best approaches to developing and articulating an investment thesis? How can fund managers approach building a top-flight team of investors, advisers and experts? Very few succeed. According to the 2017 NVCA Yearbook, commitments to venture capital funds reached a ten-year high, with 253 venture capital funds raising 41.6 billion last year. Of all funds raised in 2016, only nine percent were first-time funds.
Our team is deeply committed to helping the next-generation of investors build sustainable, successful venture capital funds across the U.S. As a membership-driven organization, we are laser-focused on bringing new fund managers into NVCA membership at the earliest stages and support them through policy advocacy, research and professional development. Our digital curriculum for Emerging Managers and our NVCA-Silicon Valley Bank Seed Managers Workshop are a few initiatives designed to drive value to this group.
What does it take to be successful as a new venture fund manager? How are next-gen VCs driving new investment strategies? To answer these questions and to get to know the future leaders of our industry, we reached out to some of our newest NVCA members.
Approaches to differentiation
“For new managers, you really have to prove yourself out there, more than the more experienced managers,” said Constance Freedman, Founder and Managing Partner of Chicago-based Moderne Ventures and NVCA Member. Freedman launched Moderne Ventures after launching and managing Second Century Ventures, the strategic investment arm of the National Association of Realtors. Moderne Ventures’ approach is multi-faceted: the firm invests in early stage real estate, finance, insurance and home services industries companies and supports companies through its Moderne Passport program.
“It’s good for emerging managers to have an angle to differentiate themselves,” said Amy Gu, Managing Partner of Palo Alto-based Hemi Ventures and new NVCA Member. “As a former entrepreneur, I had the experience of building and growing a company from a very small to a very large size, which gave me great experiences and connections for becoming an investor and helped give us our angle of being a ‘helpful’ VC for founders.”
“We’re very patient with our companies. We like to help founders in the areas they need to learn more, which is usually less on the tech side and more on the business side, learning how to fail fast, try new things, work on it, and make the turnaround faster than others,” said Gu.
“The major VC firms are pursuing larger and larger funds that tend to focus on mid, late and growth stage; first time check writers are at an all time low,” said Lisa Calhoun, Managing Partner of Atlanta-based Valor Ventures, who recently joined NVCA. “That leaves a gap where seed investors like Valor are able to source premium deals. Another plus is that limited partners get more choice than ever in picking a fund strategy that’s right for them.”
Innovative investment models
Another noteworthy feature of emerging managers is that many of them have created new or different models for their firms and for making VC investments.
“We leverage a unique, team-based operating partner model of CEO and longtime executive partners who collaborate with us,” said Adele Oliva, Founding Partner of Philadelphia-based healthcare expansion and growth equity firm 1315 Capital. “Our three operating teams remain in full-time roles, allowing us to benefit from their on-the-ground perspectives. These teams have built companies from expansion and growth phases to businesses with revenues in excess of $100 million.”
“Our Business Advisory Council is a secret weapon for us,” said Cindy Padnos, founder of Illuminate Ventures. “The Council is made up of 40 highly successful and well-connected members of the global high-tech ecosystem—all of whom work closely with us and the founding teams in our portfolio. They are an incredible resource to us for deal flow, due diligence support, customer and partner introductions and some even hold board seats on our behalf. They have real skin in the game in that most are also LPs in our funds.”
“Moderne’s industry immersion program—Moderne Passport—bridges young companies with our network of 400+ tightly aligned LP’s, executives, and influential leaders from businesses within our targeted industries, which helps young companies find, attract and service their potential customers,” said Freeman. “This unique model of ours helps tech startups look at and connect with a wider range of sectors they could potentially service and creates connections that can lead to new business and explosive growth.”
Valor Ventures in Atlanta invests in hypergrowth platform tech. They launched a pitch competition for minority-led startups that’s separate from the fund and is run as a public non-profit foundation. Calhoun says Startup Runway has become the largest pitch series for women- and minority-led startups in her region. “We realized our dealflow should represent the full spectrum of tech entrepreneurship, and owning the pipeline helps us do that. We benchmark our pipeline so that we know our sourcing strategy is working,” said Calhoun.
Next-gen investors building inclusive ecosystems across the U.S.
Inclusion is a cornerstone of NVCA’s mission. We focus on recruiting and supporting venture capital firms led by women, underrepresented minorities and other underrepresented groups in regions across the U.S. to increase NVCA’s ability to drive a positive impact on the ecosystem.
Today, 40 percent of NVCA members are located outside of the top three major U.S. venture markets: the Bay Area, New York and Boston. As the national trade group for the venture industry, we are the effective advocates for pro-innovation policy when we leverage the collective perspective of venture investors across the U.S. Insights from investors and entrepreneurs in Charleston, Pittsburgh, Madison, Omaha, Atlanta, Nashville, Dallas, Cleveland, Ithaca, Philadelphia, and other emerging ecosystems play an important role in shaping our policy agenda.
“Moderne Ventures invests 1/3 in northern California, 1/3 in NYC, and 1/3 in other parts of U.S.,” said Freedman. “What we’ve found is that the startups in the other regions are just as high quality as the ones in the major hubs.”
Oakland, CA-based NVCA Member Illuminate Ventures shares our view on geographic inclusion. “Nearly half of our portfolio is located outside of Silicon Valley,” said Padnos. “We started investing opportunistically in other regions of North America more than 5 years ago and more recently formalized our efforts. Our Students in Residence in target regions like Pittsburgh help us source and screen great investment opportunities that we may have never otherwise seen.”
“I have worked all over the country and there’s no better place in the world for healthcare growth equity than Philadelphia,” said Oliva. “This region is particularly rich in talent and opportunity. It’s a great competitive advantage to be here.”
“The Southeastern part of the country has 40% of the U.S. population, so there’s a lot of entrepreneurs in this area,” said Calhoun. “We invest outside of the Tier 1 cities. There’s a lot of opportunities in those areas that far fewer investors are looking at.” So far, they’ve made investments in Effingham, IL; Austin, TX and Brooklyn, NY.
“We can find really high performers outside the major cities since you really have to succeed in those environments. Startups have to find product-market fit and revenue much faster since they need to be making money before they even meet an investor,” Calhoun continued.
Women leading a higher number of NVCA member firms
NVCA has also put a sharp focus on gender and racial inclusion in the venture ecosystem through research, events and engaging firms led by women and underrepresented minorities. The 2016 NVCA-Deloitte Human Capital Survey captured critical data on the workforce at venture capital firms to develop a baseline understanding of demographics and human capital management practices within the VC industry. We collected information from 217 VC firms representing a total of more than 2,500 VC employees. Our survey found that women only comprise 11% of Investment Partners or equivalent. From a culture perspective, we found that firms with a human capital strategy in place had a higher average number of women on the team.
We conducted this research with the hope that greater transparency would drive change. While there is a long way to go toward gender equity in the industry, we are proud to recognize the many NVCA member firms who are leading the way to build a more competitive, inclusive ecosystem through their leadership, and, their actions. The Intel Capital Diversity Fund, Costanoa Ventures Access Fellowship, and Golden Seeds are a few NVCA member firms leading by example. Over the past twelve months, NVCA has recruited women-led firms 1315 Capital, Illuminate Ventures, Make in LA, Hemi Ventures, Moderne Ventures, Valor Ventures, Comcast Ventures, Glasswing Ventures to the membership.
Amy Gu reflected, “It surprised me when I learned how low the percentage was of women partners. It definitely needs improvement, but I’ve seen some encouraging signs in the Bay Area. I definitely encourage more women to get into the industry and be active in the industry to help improve the situation. If you see more and more women in VC, then I think the biases in the industry will slowly fade and eventually disappear.”
Padnos offered her view that more women are finding opportunities in smaller firms and change will come over time. “VC is a very rewarding space to work in, so the prospect of more women coming into the field is exciting. The slow pace of women entering VC is due in part to the fact that creating an investing partnership requires a great deal of trust. Trust is built over time, so VCs are likely to be more comfortable with someone who they have worked with before-or someone who looks and acts like themselves. To bypass these obstacles, many women are joining newer and smaller firms or launching their own, especially since larger firms so infrequently add new partners. I don’t see these barriers as malicious or even intentional, but they are likely to continue to take time to overcome.”