When Catharine Dockery set out to raise her second VC fund in September, she was hopeful that having significant markups in her first $25 million fund and a unique focus on segments often overlooked by traditional VCs—cannabis, alcohol, sex tech, gambling and addiction recovery—would send prior investors flocking to her new vehicle. Dockery
Things didn't quite go as quickly as planned.
"It was a very difficult market for fundraising," Dockery said.
But after many meetings, she managed to convince LPs, which include family offices and wealthy individuals, that her investment category will continue to attract customers in any economic environment.
This week, Dockery closed Vice Ventures' second fund at $25 million with commitments from investors including Andreessen Horowitz founder Marc Andreessen and general partner Chris Dixon, as well as Bradley Tusk, founder of Tusk Ventures. The vehicle size is the same as Vice's first 2019 vintage fund, but keeping the fund small was intentional, Dockery said.
Vice Ventures is one of the more than 1,400 micro-funds—VC vehicles under $50 million—raised since 2020, according to PitchBook data. Although the venture industry gravitated towards increasingly larger funds during the last two years of the boom cycle, the count of micro-funds—about a third of which were debut ones—also proliferated.
But now that raising capital has become much harder amid rising interest rates, venture capital industry participants expect a chunk of those micro-funds never to raise a subsequent vehicle. The widespread decline in exits means that emerging managers haven't had a chance to prove themselves, and they may find the battle to raise funds isn't worth the fight.
"We saw an explosion in the number of small funds," said Brijesh Jeevarathnam, global head of fund investments at Adams Street Partners, an LP in many VC funds. "The most likely scenario, in the forward market environment, is that this number will go down."
Fickle backers
Micro-funds mainly raise capital from family offices and wealthy individuals, such as GPs in VC funds and successful startup founders. Because of this, their LP base tends to be more fickle than that of larger firms, which is more geared towards institutional capital.
"If we have a recession, high-net-worth backers are going to be liquidity constrained," said Kelly DePonte, managing director and head of research at Probitas Partners, a fund placement advisory firm. "They might not back the next fund because they won't have the money."
While larger funds may also have difficulties raising funds in this environment, institutional LPs are generally more reluctant to walk away from relationships with established VC firms because they see those as multi-decade partnerships. If they have to reduce their exposure to private assets, emerging managers without an established track record will likely be first on the chopping block.
Since many micro-funds are on their first or second vehicle, they are similarly disadvantaged by their newness.
"Fundraising is getting harder across the board, but it is particularly hard for micro-funds," said Max Navas, a VC analyst with PitchBook. "They haven't had enough time to distribute capital to investors if they've raised a fund in the last couple of years."
The difficult fundraising environment and the general slump in venture markets may discourage some micro-fund managers, who may simply give up.
Amit Bhatti, head of the seed fund program at Bain Capital Ventures, said he already sees this in his firm's fund base. BCV, which has been investing in small funds since 2017 out of its flagship funds, currently has relationships with about 80 micro-funds, including Ryan Hoover's Weekend Fund, Sarah Smith Fund and January Ventures.
Long slog
"Folks that we backed that were part-time managers have decided to focus on the company they're running, as opposed to being dedicated to firm-building," Bhatti said. "I think that's not surprising, especially when you know you have to go out there and slog through a bunch of fundraising meetings."
Bhatti said that in 2021, fundraising processes could have taken as little as a month, but now raising the same amount could take up to eight months and require up to 100 meetings. "People may or may not have the same appetite," he added.
After nearly a year of taking meetings with investors, Phenomenal Ventures, a new firm started by tech industry veterans Helen Min and Meena Harris, was able to receive commitments for only $6 million out of the $15 million they set out to raise, The Information reported. Similarly, according to the same report, Nichole Wischoff, who raised her first $5 million fund in a month in 2021, gave up on hitting a $50 million target for her second fund. She closed it at just $20 million late last year.
One advantage micro-fund managers have is that they can outperform some funds just by writing tiny checks. "If you're a great operator and great advisor to companies, there's almost no deal you can't get into," Bhatti said. "There will always be room for a $250,000 check as part of a round. But if that same person raised a $100 million fund, they would have to lead that round and elbow out all the big funds."
Differentiated advantage
While a strong micro-fund manager can punch above their weight in terms of returns, Bhatti said a tighter fundraising market will force funds to think hard about what differentiates them from others.
A truly differentiated strategy compelled Tusk to back Dockery's Vice Ventures for the second time.
"She has all of what you'd want in a GP," he said. "She has really good intuition, limitless work ethic and the courage to take on something that most people would just be too afraid of."
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