Anyone who has considered raising a first-time venture capital fund will have met with the same advice: it's hard. So when we, two experienced VCs raising a new fund, started out, we knew it would be tough. The real surprises have come where fundraising has revealed new faces to the industry we had not previously seen.
Rich friends help
Firstly, don't believe the statistics on first-time fund managers. Most data does not differentiate between spin-outs — teams from the same fund simply setting up on their own — and first-time managers who have not been partners of the same fund together. Genuine first timers are rarer than unicorns and from our experience it’s not hard to see why. Many limited partners (LPs) who profess to back first-time managers have asked us about our team’s track record of investing, as a team — a bar which only spin-out managers could clear. Where we have found other, genuine first-time managers, significant personal wealth or family money is often a big early success factor.
Nepotism is big
Related to this — and no doubt driving the well-publicised lack of diversity in VC — we have found that fundraising is way more network-driven even than we had accounted for. The number of times we have heard LPs and general partners (GPs) say, "I won't take a meeting unless it comes through a warm intro" is really quite scary. It's a reminder that in fundraising, and not just deal access, it's very much about "who" you know, not "what" you are proposing to do with the capital. For an industry that prides itself on its rationality, limiting itself to existing networks is strikingly irrational. It is also curiously far behind the traditional corporate world in this respect, where network dependency and nepotism are largely relics of the past.
For an industry that prides itself on its rationality, limiting itself to existing networks is strikingly irrational.
True innovation is rare
Next, for an industry predicated on innovation, the lack of innovation in VC is striking — and largely unnoticed. To the extent that funds differentiate, this is mainly on brand; not on segment-specific knowledge to identify winners, nor on the value-adding advice and services that funds can deliver for founders. We have heard LPs talk about backing “Silicon Valley-style” funds — without being able to describe how they are different. In the same breath, one GP said they differentiate by being "contrarian", but pride themselves on their long list of “Tier” 1 co-investors — without a hint of irony. We have come across few individuals who are thinking hard about how to innovate around the traditional VC model, for example, in providing distinctive value-adding support for founders, beyond the typical pitch of having a good network.
Diversity matters — but not that much
It is encouraging that diversity is beginning to really matter to LPs but the bar is still low. It has come up in almost every conversation we have had, but it’s clear that you don't have to be Backstage Capital to pass the test. A recognition that your team has to be diverse (even if it isn’t yet), and can recite basic stats about the proportion of capital going to all-male founder teams, seems to be sufficient. One LP even asked whether we had any "outstanding accusations of assault or harassment" because several others raising funds unfortunately had such claims. The industry knows it has a problem but the lack of innovation, the difficulty of starting a fund without personal wealth and the industry’s reliance on network all stack up against solving it.
VCs are big back-slappers
Finally, virtue-signalling is rife, and inversely correlates with helpfulness. Twitter is the VC’s medium of choice, and the echo-chamber is primarily used to signal prowess in being smart — about markets, trends or specific companies. This extends to face-to-face conversations, where several VCs have misled us about deals (“we passed on that” — when we know they didn’t) presumably to hide any sliver of weakness. Unfortunately it also hides any sliver of humility and doesn’t do much for credibility. But Twitter is also used for mutual back-slapping and self-conscious positioning about supporting “the ecosystem”. One VC posting recently — to great acclamation — about the value of their systematic approach to always taking intros (warm or cold) has ignored two separate warm intros made to us by mutual connections. Offsetting this are a number of people who use Twitter to share genuine, value-adding insight for new managers; some of our best advice has come through following around a dozen key individuals.
So despite our pre-existing experience of the VC industry, fundraising has revealed an uncomfortable new side to this world. Between the mini victories and setbacks that we encounter each day on our path to raising, we are not in a position to change much — at least for now. But with enough new blood entering the industry with different takes on how things can be done, we are optimistic that change will come.
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