A recent report by PitchBook[i] highlights a growing exodus of seed investors from established, blue-chip venture capital firms. But if the trend spreads, VC firms will not make it easy for those looking to leave the nest. In fact, there are already practices designed to clip the wings of “free birds”, making it even more challenging to take flight. What can they do to make the departure process advantageous for everyone?
Why are people leaving big VC firms?
Dissatisfaction with institutionalisation: Seed investors, traditionally drawn to the agility and risk-taking nature of venture capital, are increasingly frustrated by the growing institutionalisation of blue-chip firms. As the PitchBook notes, “Venture has a reputation as investing’s swashbuckling, rebellious and risk-taking youngest child. But as blue-chip assets under management have ballooned, venture firms have become more institutional and bureaucratic.”
Seeking greater autonomy and upside: Many seed investors are leaving in pursuit of greater autonomy and a larger share of the financial upside. They are willing to trade the stability of established firms (and the salary) for the potential rewards of independent ventures. A quote from an anonymous VC in the report encapsulates this sentiment: “I have many friends weighing this choice right now and expressing frustration at how large and hierarchical these venture firms have become.”
Implications for the VC: This trend could reshape the venture capital landscape, potentially leading to a surge in new, independent seed funds. It also raises questions about the future direction of blue-chip firms and their ability to attract and retain top talent.
Emerging investors and blue chips: can they work together?
The trend signals a significant shift in the dynamics between seed investors and blue-chip VC firms. This trend may be driven by a misalignment of values and expectations. Seed investors, often driven by an entrepreneurial spirit, may find the bureaucratic structures of large firms stifling. Furthermore, the lure of greater financial rewards in independent ventures can be a powerful motivator.
Raising a solo GP fund is challenging, especially since many venture firms don’t make it easy for departing partners to take their investment track records.
Megan Maloney, founder of Dria Ventures, explains in the report that even when principals are involved in deals, their names often aren’t officially associated with them. Firms justify this by citing confidentiality or the collaborative nature of deal sourcing.
This makes it difficult for anyone looking to depart to prove their deal-making abilities to potential investors. I find this behaviour petty and bitter on behalf of the blue-chips. Yet, it also reiterates that the firm fears you will attract some of their LPs and that they are losing valuable talent.
If you look at it a different way, it is also a missed opportunity on behalf of the larger VC to get access to new deals. Here’s why:
Nichole Wischoff, founder and general partner at Wischoff Ventures, believes multistage funds are “desperate for deal flow” and will partner with virtually any general partner for access to new opportunities. Those who successfully build these networks tend to thrive, she explains in a TechCrunch article.
Wischoff predicts this trend will continue, with a few emerging funds securing top deals and eventually reaching blue-chip status. Many will attempt to become multistage due to the lucrative nature of that model, citing Thrive Capital as an example of a firm building something special.
Back in March, Miles Grimshaw announced he was rejoining Thrive Capital as a general partner after working as a general partner at Benchmark for the past three years. Grimshaw initially joined the New York venture firm founded by Joshua Kushner in 2013.
In a post on X, Grimshaw said at the time of the announcement that he was “elated to re-join the team at Thrive” but that he also “looked forward to continuing to partner with Benchmark, as Thrive has for many years.”
However, Wischoff concludes that those who do not partner with larger firms could find themselves struggling or even failing to raise their first fund or keep momentum. Some LPs could be concerned about any solo GPs who have not done deals in downtimes, so partnering with former funds is an added assurance.
There are two ways this could go. If some smaller LPs (i.e. potential anchor fund investors) or a larger multi-stage firm believes in an emerging manager as a deal closer with enviable founder contacts and specialist knowledge that solo GP will be either 1) a threat to their former employer or 2) a shiny new external deal source.
However, let’s be honest here. Having the backing of a prestigious firm (i.e. your former employer) can significantly accelerate fundraising. Courtney McCrea, managing partner at Recast Capital, points to Peter Boyce II’s Stellation Capital as an example. Boyce II quickly raised $40 million after leaving General Catalyst due to their endorsement. McCrea notes that this level of support is rare for most emerging managers.
When support from your former firm is not happening, there is support for emerging managers offered by firms such as RAISE Global. RAISE, for example, offers a range of in-person and virtual events that connect emerging fund managers to capital and resources. RAISE helps LPs meet and invest in the best-emerging funds that fit their investment profiles. The emerging manager application deadline for RAISE Global’s October Summit is June 30, 2024. RAISE says it expects more than 500 GPs to apply.
VC is changing
The long-term implications of this trend of emerging managers remain to be seen. However, it is clear that the venture capital landscape is evolving. The rise of independent seed funds could inject new energy and diversity into the market. It could also lead to increased competition for deals and talent. For blue-chip firms, this trend presents a challenge. They may need to adapt their structures and incentives to retain top talent and remain competitive in the changing landscape.
In the meantime, get quoted in as many deal reports and articles as you can, to build rock-solid proof you have a track record worth partnering or investing in. Network in advance of any departure and become a voice in your specialist area on panels, podcasts and webinars. That way your reputation is already doing a lot of the heavy lifting before you take off on your own.
Version One’s Boris Wetz shares his fundraising advice for emerging GPs:
- Focus on your minimum viable fund:
- Determine the smallest fund size needed to prove your investment strategy.
- Prioritize raising this amount over your ideal fund size in the current market.
- Avoid one-way doors of the bad kind:
- Be cautious of offers that seem attractive but could harm your fund’s future.
- Don’t compromise on long-term partnerships or make deals that damage your fund’s structure.
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Email Kate at editor@buzzvestor.com
[i] Seed investors hitched their wagon to blue-chip VC firms. Now they’re hightailing it – PitchBook
