Venture capital firms looking to raise money better be up for a challenge.
Only 144 venture capital funds closed in the first quarter, significantly lower than the quarterly average of 460 over the past five years, according to the latest venture capital report from Preqin. Global VC funds raised a total of $27.5 billion in the first quarter, slightly up from $25.2 billion in the quarter before but down 67 percent from the peak recorded in the first quarter of 2022, according to the report.
The fundraising market also is becoming more concentrated in larger funds. According to Preqin, half of the capital raised by venture capitalists in the first quarter went to five funds.
“The drop in the total number of funds closed and a higher average fund size this quarter suggest a more challenging environment for smaller managers,” the Preqin report said. A similar trend has already been spotted in private equity. Big PE firms such as Blackstone, Apollo, and KKR raked in record amounts of money in 2022, while their smaller peers struggled.
“In a bear market for technology, historically larger funds have been able to use their brand, track record, and scale to secure more capital during turbulent markets,” said Sanjeev Krishnan, chief investment officer of the Chicago-based VC firm S2G Ventures. “We believe this trend [will] continue, but there is room for emerging managers [who] are highly differentiated, especially in new industries.”
According to Preqin, VC funds targeting the Asia-Pacific region are in a better position to raise capital than those in North America and Europe. The largest fund closed in the first quarter was led by Primavera, an Asia-focused venture capital firm that has backed Chinese e-commerce giant Alibaba and TikTok’s parent company Bytedance. The fund closed with a $4 billion commitment, which accounted for 15 percent of the total value of funds closed in the past quarter.
“APAC-focused funds could be best placed to raise funds, given the weak market sentiment, as there are plentiful early-stage investment opportunities with smaller ticket sizes,” the report said. For example, many Chinese companies in renewables, hospitality, and smart infrastructure are attractively priced. In the first quarter, about 45 percent of VC funds said they would target the APAC region in the next 12 months, up from 30 percent during the same period in 2022, according to Preqin.
“Asset managers in North America are incentivized to invest in Asia to access [the] growth potential of the regional market,” said Kaidi Gao, venture capital analyst at PitchBook. Business models in developed markets such as the U.S. and Europe may thrive in Asia and Latin America if companies can successfully implement a localized version, she added.
Preqin expects VC funds with a focus on early-stage strategies to have an easier time raising capital. Valuations of early-stage companies have been more robust than later stage start-ups. Smaller and early-stage deals are also more digestible for private market sponsors in the current environment.
But Gao said early-stage VC funds still face challenges. “Early-stage funds tend to be smaller in size, which means managers could be fundraising from a variety of LPs, including institutional investors as well as high-net-worth individuals or family offices,” she told II. “But those smaller-scale investors may still have liquidity concerns, especially if their public holdings have performed poorly.”
“In addition, with larger-scale funds having moved into early-stage, the landscape has become more competitive, which adds to challenges for early-stage fund managers [trying] to fundraise,” she said.