The state of venture capital: How to succeed in a changing industry

In our latest webinar, Juniper Square’s Eugene Tetlow was joined by Jeff Bloom, Counsel & Operating Advisor at Gunderson Dettmer; Kelli Fontaine, Partner at Cendana Capital; and Sean Park, Managing Director at Citizens Private Bank, for a discussion about the state of VC in 2024. Here is a summary of that conversation.

All three panelists believed that fundraising in 2024 would be close to 2023’s level of $67 billion. Although this amount ranked as a six-year low, nothing specific in the industry suggests imminent changes. Fontaine suggested that the industry is resetting as the amount of capital available drops to match the size of the opportunity set.

Bloom pointed out the capital overhang (dry powder) and the grudging willingness of companies to accept down rounds as another reason fundraising is likely to stay on par with 2023. Park mentioned that the denominator effect is less of an issue currently, given the state of public markets. This is another reason for fundraising to stay relatively flat.

We also polled our audience during the webinar, and contrary to the panel's perspective, 58% of listeners expected 2024’s fundraising totals to exceed 2023’s.

Right now, data suggests that LPs are largely recommitting to existing fund manager relationships instead of backing new funds. However, the panel had advice for first-time fund managers (FTFs) and existing GPs seeking capital from new LPs.

“Be a contrarian. Everyone is in the hot sector now, but the hot sector and the successful company in a given year are never the same,” said Fontaine. Differentiation is critical, whether it’s sourcing, domain expertise, or a unique background that provides a way to see around corners.

Bloom urged fund managers to “have everything buttoned up. You get one chance to do it right.” Ensure all your operations, operational diligence, systems, and compliance are completely organized. Work with a tax partner, law firm, and compliance firm that are well-known and trusted by LPs. Park noted that institutional-grade infrastructure “is just table stakes now. The LPs expect it.” FTFs must also find a way to demonstrate a track record of investment success in a prior environment. Fontaine noted, “We back first-time funds. We don’t back first-time investors.”

GPs also need to own their mistakes from past years and describe the corrections made to prevent repeating them.

Communication with LPs is critical—and they want more of it. “They’re a limited partner in your fund, but they’re not passive,” Bloom observed. Park said that LPs’ desire for information stems from a desire to be collaborative. Fontaine—herself both an LP and a GP—suggests that GPs give LPs the information that “you’d want as an investor.” This means providing not just a company’s upside case but also the downside case. The old approach of only showing LPs the company’s valuation is insufficient since valuations have changed so much in the current market. Fontaine commented, “LPs want color to be able to benchmark performance.”

Along with providing LPs with more information, GPs must prepare for upcoming regulatory changes. Chief among these are the expanding Anti-Money Laundering (AML) requirements proposed by the Financial Crimes Enforcement Network (FinCEN) and the SEC’s new rules for private funds.

The panel suggested that the new AML regulations will bring helpful consistency to VC fund managers. AML programs will require real commitment from GPs and a true effort to correct any problems, and hiring third-party service providers can provide a clear path to compliance. Although this may increase operating costs, it will create a consistent set of expectations on both sides. “Every time regulations are implemented, people tear their hair out, but it’s not a giant problem,” says Bloom.

The private fund rules, which require enhanced transparency about fund terms, also seem more helpful than harmful. Sophisticated LPs are already doing the diligence to uncover different sets of economics or fund structures for various LPs. The panelists thought bringing awareness to potential conflicts of interest might be healthy for the system. In general, they expect this type of reporting to become routine.

Unlike the turmoil expected after Silicon Valley Bank’s collapse, not much has changed other than more startups are using two banks to reduce risk. More players are active, and there’s a spectrum across the market, from low-touch fintech institutions to very high-touch relationship banks that understand the VC industry and provide the products and services that funds need. Park suggested that these full-service startup-focused banks will likely become market leaders again over time.

Currently, the VC market is going through one of its periodic resets. While the days of “shooting fish in a barrel” are gone for the moment, innovation continues. The funds with a unique way of finding and growing these startups will succeed. It takes hard work and intense focus, but that’s what venture has always required.

Want to hear the panel’s full take on fundraising, how GPs can succeed and make their LPs happy, how to respond to new regulatory requirements, and lessons from the banking crisis? Watch the full webinar on-demand now.