How to build a venture firm (for the long term)

This article was originally published in the Q2 2024 PitchBook-NVCA Venture Monitor.

The $67 billion raised by venture funds in 2023 was the lowest annual total since 2017. While many hoped for a recovery in 2024, we at Juniper Square have yet to see hard evidence that anything has changed. Looking at our internal data on a “same-store sales” basis (ignoring new customers), capital raised is down ~11% in the first five months of 2024 vs. 2023. Some GPs are reporting “green shoots” in the fundraising market, but it has yet to be seen in the pace and size of fundraising.

Everyone knows the perfect storm that contributed to this slowdown—high inflation, uncertainty around interest rates, and increased antitrust activity. The end result has been a lack of exit value or DPI. Limited liquidity has made LPs less willing and able to allocate capital back to VC funds.

While the IPO pipeline is beginning to move again—Astera Labs and Reddit were a few bright spots—more success stories are needed to free up investor capital. We are monitoring M&A activity and potential IPOs from Klarna, Databricks, Shein, and other VC-backed companies to gauge where the winds are blowing.

Over the last decade—until 2022 at least—commitments from LPs fell into the hands of anyone who could deliver a good pitch and a few paper markups. It might have been luck and timing as much as strategy, and many of those first-time funds could raise and operate successfully with minimal infrastructure.

Ten years of growth allowed young firms to substantially grow their headcount and AUM. However, larger teams and multiple funds are now burdening firms that over-raised. As Meghan Reynolds, Head of Capital Formation at Altimeter, said in an episode of our podcast The Distribution by Juniper Square, “Organizational complexity is the enemy of returns.” Her take was that as organizations evolve and mature, the people who launched those funds get further away from deal-making and investing because they are too busy managing the organization. Altimeter, which manages nearly $18 billion in AUM with fewer than 30 employees, understands how vital it is to continuously look for new technologies to drive operational efficiencies, allowing the key people to stay focused on investing and delivering for their LPs.

Or, as another GP told me, “We’re focusing on what we can be good at, and we don't want to be good at fund administration. We want to be good at investing and serving our investors.”

This is a good lesson for venture firms in any economic cycle, but it’s critical now when capital is hard to come by—you don’t need more people; you need the right people using the right tools to build a great firm.

Given the current landscape, many venture LPs are thinking to themselves, I can't invest as much as I want because I don't have the liquidity. But remaining loyal to the venture firms who have delivered great realized returns is vital for the long-term.

These concerns have generated big swings on the GP side, creating a dynamic of haves and have-nots. Our venture clients with the longest, most impressive track records are still quickly closing large funds (one raised $800 million in less than three months), but emerging managers are struggling. As a result, these managers are eager to find exit opportunities to return capital to LPs sooner and are scaling down their fund size goals for future fundraises. They are also jealously guarding the capital they have raised, with the deployment pace among most investors being just enough to stay in the market.

One GP spinning out of a large VC firm told me a few weeks ago, “The best advice I’ve gotten is to make my fund seem like an inevitability.” This advice, typically given to VCs raising their first fund, also applies to firms looking to convince their investors that the performance they saw in early funds indicates a repeatable process, not luck. This perception is critical to LPs putting your firm on their “must re-up” list, especially when capital commitments are scarce.

While performance will always be number one, successful VC firms appreciate that every interaction can influence an LP’s opinion of their firm. Firms must make each LP touchpoint delightful. Katie Riester, Managing Director and General Partner of Fund of Funds Investing at Felicis told me that her team increased the communication rate over the last few years—formal updates approximately every 45 days, with informal interactions and visits even more frequent. “We write more frequent and shorter updates rather than longer letters. We aim for someone to read it in a few minutes and get the most important information. We want everyone on the same page.”

However, making LP touchpoints delightful is particularly challenging for VC firms with smaller teams using disparate investor management tools. Outdated and disconnected systems are the enemy of effective internal data management. The best-run venture firms are supported by a universal lifecycle management system that spans fundraising, investor management, and fund administration. By pairing investor CRM data with financial position data in a single consolidated portal, VC firms can create an ecosystem where everyone–from finance to IR to the LPs themselves—can look at an investor’s position across multiple funds, know their history, and understand the performance of that client’s investments, ideally with no manual lift.

As keepers of the official books and records, fund administrators maintain that “source of truth” for most investor and fund data and, as a result, are critical partners in any data management strategy. Traditionally, VC firms needed to choose between working with a fund administrator who could bring innovation to the table but could only support smaller funds or working with a more traditional administrator with strong institutional chops but was overly reliant on outdated, third-party technology. For VC firms with high expectations for themselves and the experience they give LPs, the future must include administrators who specialize in working with more complex firms and can push the technology envelope to benefit LPs and internal stakeholders.

Fundraising is hard enough even when things are good. If a prospective investor is ready to invest, why add friction? Whether it be offline fund subscriptions or a 90s-era investment portal, these missteps can create concerns in LPs’ minds about your ability to manage the internal operations of your fund. While you may not control market conditions, you can control your fundraising operations, and the right tools make all the difference. They lead to faster, frictionless closes, stronger LP relationships, and operational excellence for the life of your fund.

One of our clients, for instance, consolidated data and documents from seven primary systems into our universal platform, allowing them to better collaborate and work as a global IR group rather than fund-specific teams. Another client found that our integrated platform—which includes data rooms, investor CRM, reporting, and investor portal—proved a boon for data governance across the organization, allowing their accounting team, fundraising team, and C-suite to see the same investor data and eliminate some of the risks of human error in moving information around.

A once-in-a-lifetime shift is underway in the private markets. LPs are in the driver’s seat and expect the technology venture firms offer to match the technology bar that the firm has set for potential portfolio companies.

We all know the basic rule from Investing 101: get fearful when others are greedy, and get greedy when others are fearful. Those who raise capital today have the potential to see strong returns when the market recovers (and it will). Those who make it through today’s gauntlet will be the face of the next generation of venture. We can’t wait.