InAugust, venture capitalist Sherman Williams learned that one of his institutional investors was backing out of a $15 million check. Williams suddenly was out 30% of the capital for AIN Ventures, a Black- and woman-led first-time fund focused on deep tech that he was raising.
Many emerging VCs like Williams have seen their own investors, known as limited partners, decide to invest in already established firms rather than making a dicier bet on less-proven VCs—indicating that an industry that prides itself on taking risks is becoming more risk averse with the market downturn.
Eunice Ajim, who is raising her first fund to back seed-stage startups in sub-Saharan Africa, says that when she attempted to conduct her first capital call—in which VCs ask for LPs to wire over a portion of the money they committed—more than half of the money did not arrive. As a result, she’s been forced to make $25,000 to $50,000 investments into startups in which she’d previously been hoping to invest $100,000 to $150,000.
In a more extreme case, Tiger Global, whose partners reportedly committed $1 billion to invest into emerging funds, has reneged on several commitments it made, according to multiple sources. Among those affected were On Deck’s ODX fund, which subsequently underwent layoffs, and Turner Novak’s Banana Capital, which has decreased the target size of its second fund by more than half, according to three people with knowledge. Tiger Global, ODX and Novak declined to comment.
Tiger partners significantly reduced their check sizes after a long wait purportedly to conduct due diligence, say two fund managers who were affected but asked not to be named due to their existing relationship with Tiger. VCs tell Forbes that the length of due diligence has lengthened across the board, and some surmise that it’s a way for LPs to get out their commitments. “We declined to move forward with some LPs because the due diligence they were asking for was not worth what they were willing to invest,” says Heavybit managing partner Tom Drummond.
“At the end of the day, the most diverse set of capital in venture is in the emerging manager space.”
This year, U.S. venture capital firms raised a record $150.9 billion through the end of September 2022 from their investors, according to Pitchbook. But for emerging managers like Williams and Ajim who are helming unproven funds that they hope to build into storied firms, the experience of raising money has paradoxically become more difficult. Emerging funds—often the gateway for women and underrepresented minorities to break into VC—have been squeezed out of the budgets of institutional LPs like pension funds and university endowments.
“At the end of the day, the most diverse set of capital in venture is in the emerging manager space,” says Andre Charoo, founder of emerging fund Maple VC. “We were a driving force to bring capital to a diverse set of founders. Now, that’s likely to be reversed.”
According to a report by BLCK VC, 54% of Black VCs who attained the status of “partner” did so by starting their own fund rather than being hired or promoted by an existing firm. On average, those funds are 46% smaller than the industry average, the report notes. “Sometimes, people incorrectly label being Black, Latinx or a woman as a risk factor,” says Daryn Dodson, managing director of Illumen Capital, which invests in funds of people from disadvantaged backgrounds.
This year, only 100 first-time funds have had success launching, compared to 307 last year. While emerging funds make up the majority of the top-quartile performers, according to Cambridge Associates, the wrong high-risk, high-reward bets on emerging funds could now be a fireable offense for institutional investors. That poses a rocky road ahead for the glut of venture firms that were born during VC’s bull run—1,100 new ones since 2018, by PitchBook’s count.
Meanwhile, already established firms are growing ever fatter. Funds sized $1 billion or larger have received three fifths of the capital so far this year, per PitchBook, up from 34% in 2021. As the market took a turn for the worse, LPs began to concentrate their investments into what they perceive to be safer bets.
“If you’re an institutional investor and you have the choice between investing in Andreessen Horowitz’s $9 billion fund versus firm XYZ’s new fund, it’s like how no one gets fired for investing in Coca-Cola stock,” says Garth Timoll, managing director at Top Tier Capital Partners, an institutional LP that backs venture funds.
In other words, institutions aren’t likely to fault their investing team for putting money into VCs that have demonstrated strong, decades-long track records.
“We’re going to weed out the tourist emerging managers that don’t have the conviction to make it work with less money. Good riddance.”
“We lived through a Cambrian explosion of new funds,” says Chris Douvos, a longtime LP who now runs Ahoy Capital, which invests in both startups and funds. “For a lot of people, raising a fund was what law school is for aimless college kids. It seemed like a good idea and like it’d be fun—and it was fun as the market was going up.”
But around March as the market contracted, investors began to face a liquidity crunch. Many VCs relayed to Forbes stories of LPs that quickly shut the door on their faces, as in the case of Heavybit, which closed an $80 million fund earlier this year. After spending months in pursuit of a big institutional check, managing director Tom Drummond says a university endowment abruptly told him in April that it would no longer be investing in any VC firms. “That was the light switch for us that something has really dramatically changed in the fundraising market,” he says. “When someone who’s willing to invest all this time and energy with us suddenly says, ‘We’re not sure about this space anymore,’ that was a catalyst for us to say, ‘Let’s not waste our time—let’s close our fund out.’”
“What’s going to happen now is we’re going to figure out who are the gritty emerging managers that are willing to take on the $20 million or $30 million funds when in the past they might’ve gotten $75 million or $100 million,” says Roland Reynolds, senior managing director of Industry Ventures, which invests in funds and startups. “To me, that’s really healthy. We’re going to weed out the tourist emerging managers that don’t have the conviction to make it work with less money. Good riddance.”
For now, many emerging managers are waiting in hopes that LPs who gave all their money to megafunds at the start of this year will have new money to allocate in 2023. But for the most part, LP’s venture capital budgets for next year are already earmarked for their existing VC firm relationships, according to Brijesh Jeevarathnam, global head of fund investments at Adams Street Partners, which invests in venture funds. “I think it’s hard to foresee a scenario where through 2023, this changes radically,” he tells Forbes.
“Never let a good crisis go unused.”
AIN Ventures’ Williams says he’d known that fundraising would be extremely difficult. “I’m African American and I’m raising a fund in venture capital,” he tells Forbes. “Maybe it’s Stockholm syndrome, but I just assumed fundraising was going to be a nightmare.” Nevertheless, it could become even more nightmarish to try to fundraise next year. Even VCs that successfully raised from an LP in a previous fund may not receive the money for their next effort.
“Typically in down markets, LPs will consolidate their commitments. If they invested in ten [VC firms] before, now they might consolidate it to five,” says Accolade managing partner Atul Rustgi, who invests in funds, adding that he expects consolidation to begin within a year.
“The downturn is a catalyst for institutional LPs to reevaluate their portfolios,” says Cendana Capital founder Michael Kim. “Never let a good crisis go unused.”
A prolonged downturn could result in hundreds of “zombie” funds, VCs say, paralleling a similar influx of VCs that emerged in the late 1990s. “A lot of those funds just withered away and became deadwood,” says Douvos, who worked for Princeton University’s endowment in the aftermath of the dot-com crash. “I remember a conversation in 2004 with [Sequoia chief] Doug Leone where he said, ‘We need another year of grinding downturn to really get rid of the people who don’t belong in this business.’ History doesn’t repeat itself, but it rhymes.”
Kim, whose firm mostly backs smaller emerging funds, is advising VCs in his portfolio to close their funds quickly—even if the fund size is short of the VC’s goal—and use the time instead to build a track record by investing in startups.
Still, it’s a discouraging sign for the emerging funds that function as a ground zero for elevating diversity in VC and startups, Dodson says.
“When I talk to women and people of color emerging managers, a lot of them are just trying to process the fact that they’ve been outperforming their peers and not understanding why they’re not getting more allocation relative to their performance,” he says.

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