Who will be better in the current fall?
Will it be veteran investors with years of experience through multiple market cycles – but with a large portfolio to worry about – or budding managers looking at the market with fresh eyes and a clean slate? We’re going to check it out.
A record 270 first-time funds closed last year, according to Pitchbook data, meaning there are nearly 300 new managers who raised their money in the bull market and are now deploying it in very different market conditions.
We examined six early-stage funds to better understand how this group of investors is faring.
Many first-time fund managers, such as Giuseppe Stuto, co-founder and managing partner of 186 Ventures, a Boston-based early-stage generalist fund, told TechCrunch that going into a downturn with a very small portfolio can be a huge advantage.
“If we already have funds or have a lot of capital, we don’t carry baggage that seems too inflated,” Stuto said. “Like a founder, who sees the world differently than subject matter experts, we (first-time managers) bring a fresh perspective to certain problems and how industries are developing.
Leslie Feinzag, founder and CEO of Graham & Walker, added that while she only started investing during the bull market last year, the firm’s focus on downstream risk was critical — as a first-time fund manager, she couldn’t risk her growth track record in any way.
“The big advantage is that we don’t have a lot of high-risk early investments, and we don’t need to focus a lot of our time on diversifying the portfolio,” Feinzig said. I can focus almost entirely on the road ahead.
Since these investors have a small garden to tend, they say, they can focus more on making sure that the new companies they add to the portfolio are stronger than the current market trends.
One thing these managers are better equipped to help with their portfolio planning is runway. Stuto said expansion financing wasn’t a big part of the conversation when 186 Ventures started investing in the halcyon days of the bull market, but now that it’s clear it will be a challenge for startups, 186 Ventures plans to focus more. The investments allow for a longer runway.
“Bridge financing was so readily available last year that it was easy to hand-wave whether you could attract new investors in a ‘small’ round,” he said. “Part of our thesis now is that this bridge financing may not be available, so we’ve added a level of ‘market readiness’ depending on whether the industry and other financing partners are around.
Ariana Tucker, co-founder and sole practitioner at Conscious VC, agrees, and while she’s still looking for similar startups, she’s definitely focused on deals that give the company a 24- to 36-month runway.
Read the full survey here to find out what they’re doing to prepare for the downturn, how their investment practices have changed and how they can make the most of them.