What is the situation of small venture capital firms in a more conservative market?

Similar to all bear markets, risk appetite diminishes, and while emerging fund managers often outperform their more established counterparts, some limited partners are wary of bringing in new risk partners. Instead, they stick with their established and trusted partners.

For some emerging managers, this means it will be more challenging to penetrate the market. For those with funds that focus on supporting diverse founders who are already working with less capital, the downside is often the difference between another funding round or shutting down.

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“Risk is also sometimes perceived as something outside the status quo,” said Madeline Darcy, Managing Partner at Kaya Ventures, to TechCrunch+. “The pattern matching we often talk about for founders and hoodie-wearing young people leaving Stanford has an equivalent in the venture capital world in the form of spin-outs from big, renowned funds that tend to have less diverse teams.”

B. Pagles Minor, a first-time fund manager who launched DVRGNT Ventures seven months ago, told TechCrunch+ that the fundraising environment hasn’t necessarily been a walk in the park. They are seeing increased emphasis on due diligence, with limited partners requesting more metrics and data than Minor expected. Some of these requests have also been costly.

“For example, certain types of insurance that were not typical before are now being requested, which represents a financial burden for emerging managers who may struggle to pay for them”,

…said Minor. Minor has also noticed a growing trend of limited partners requesting waived management fees or a lower profit margin in the fund, adding more pressure on a fund manager’s ability to build and operate the fund, they said.

What are the consequences for startups?

• Limited access to financing: With a decrease in risk appetite in a more conservative market, startups may face difficulties in securing additional funding. Limited partners may be hesitant to back early-stage companies, limiting opportunities for growth and development.
• Increased competition for funds: With fewer investors willing to take risks, competition for available funds becomes more intense. Startups must stand out among the crowd and present strong and compelling proposals to attract investor attention and secure necessary funding.
• Heightened emphasis on due diligence: Investors may require more data and metrics to evaluate the potential return of startups. This can increase the workload for startups in gathering and providing additional information, as well as incurring additional costs associated with more rigorous due diligence.

Bet on capital debts?

• Increased investment opportunities: The emergence of capital debts presents venture capital firms with new investment opportunities that can diversify their portfolios and potentially generate attractive returns.
• Access to alternative financing options: Venture capital firms can leverage capital debts as an alternative financing option for startups in a conservative market. This allows them to provide funding to promising companies while managing risk and aligning with the current market conditions.
• Enhanced risk management: By incorporating capital debts into their investment strategy, venture capital firms can enhance risk management practices. The inclusion of debt-based instruments can provide a more balanced approach to their investment portfolio, mitigating risks associated with equity investments.

To read the information in detail, visit: TechCrunch