- The rise of new tech hubs across the United States creates opportunities for regional fund managers
- At the same time, regional venture capital (VC) managers are facing greater competition, both locally and nationally
- Emerging managers (EMs) need more than regional expertise to stand out. They need innovative models and compelling pitches
To succeed, today’s EMs must build their business on more than just an address: They must differentiate their thesis, innovate new VC business models and tell their story better than ever before.
The rise of the regions
As tech talent disperses across the country, EMs in rising tech hubs like Atlanta, Austin, Chicago, Denver and Miami have front-row seats to new opportunities. This new generation of VC managers is not only finding attractive deals — they’re leading the next wave of innovation for the VC industry.
But success won’t be easy in a crowded field. At SVB, our emerging manager practice is onboarding 10 times as many firms as we did in 2019. We are currently tracking more than 1,750 firms, approximately 40% of which are based outside the traditional homes of venture capital (New York City, Boston, the San Francisco Bay Area and Los Angeles).
At the same time, the COVID-19 pandemic has made established and emerging VC managers more comfortable investing in new markets without traveling, meaning regional specialization won’t be as great a barrier to competitors.
Emerging managers are left facing fierce competition for fundraising and deal flow. This confluence of timing and opportunity serves as an impetus for EMs to innovate.
The new regional emerging managers:
Differentiated and disciplined
Traditionally, the minimum standard of differentiation for an underdog fund was a unique thesis — a pithy and well-researched viewpoint that could set a firm apart from others. Yet as I’ve worked with hundreds of investors over the past decade, it’s been shocking to see how many firms hold fast to a vague strategy — investing in industry-agnostic companies in specific verticals; prioritizing generic metrics like “X” amount of traction, revenue or active users; or simply following the herd.
That’s particularly noteworthy for EMs: If they want to be competitive in today’s market, they cannot be generalists who are merely focused on atypical geographies. To truly differentiate, EMs need a defined, specific thesis. A clear philosophy leads to more meaningful relationships with LPs, better industry connections, a tighter focus on market size (including total available market, serviceable available market and serviceable obtainable market) and a greater ability to vet promising founders.
For example, Mac Conwell, managing general partner of RareBreed Ventures, based in Baltimore, Md., made waves by raising his first fund from small-check investors almost entirely via Twitter. His differentiator was clear throughout the fundraising process — these small-check investors previously had no outlet to get into the VC market. He filled a gap and found success.
Meanwhile, Samara Hernandez at Chicago’s Chingona Ventures has grown her fund with the core belief that the strong performing founders referenced in the fund’s name deserve better than the VC status quo. Hernandez’s success serves as a reminder that VC is ultimately a service business providing advice, connections, referrals, go-to-market strategies and other factors required for rapid growth. While traits such as responsiveness, empathy and intentionality might seem table stakes for the industry, Chingona takes these further than its competitors to differentiate itself.
How to stand out in rising tech hubs
As the regional tech hubs become more competitive, a few basic principles can help EMs stand out.
1. Innovate your model.
Technology, partnerships and even new businesses can reinvent every part of the VC business model. Even the established venture firms are innovating. For instance, Andreessen Horowitz has an entire publishing arm, Future, that serves as a marketing channel for both the firm and its portfolio companies. Harry Stebbings, on the other hand, followed a unique path into Gen-Z VC. The host of the podcast 20VC translated his media platform into an $8 million debut venture fund in 2020 and then raised $140 million to close his second fund less than a year later 1.
2. Tell your story well.
Approaching LPs is more than a sales process; it’s a way to set the foundation for a partnership that should last years — or even decades. Get off on the right foot by painting a picture of where you’re headed. The VC pitching pros at 4th & King share their expertise in developing a differentiated pitch supported by credible evidence.
3. Share the numbers behind your success.
Fund management storytelling is like bringing a resume to life — you must frame your previous successes and risk mitigation efforts to prospective LPs. The easiest way is to share your investing track record. If you’re a first-time general partner (GP), you can include data such as how much money you’ve helped companies raise (through coaching and investor connectivity), angel returns, your history of deal scouting, your track record at firms in a pre-partner role or your history as an operator with exit or significant fundraising success.
4. Know your audience.
Institutional LPs such as pensions and endowments typically look for a longer time horizon, preferring to partner with a lasting firm for years to come. Therefore, it’s important to build a genuine relationship with these LPs early since the cycle can be much longer. When it comes to high-net-worth individuals, smaller family offices and super angels, focus on your top targets and speak specifically to their needs and wants. The best storytelling demonstrates that you are the only person who can solve the problem you’ve identified.
Adjust your plan
If your fundraising strategy doesn’t yield success, don’t be discouraged. Instead, consider these strategy changes outlined by our friends at Pear VC:
Adjust your fund size
Accept a longer process
Concentrate on deepening established relationships, rather than building new ones
Prepare for more-thorough due diligence by creating a bulletproof data room
A new landscape for VC
It’s ironic that venture capital, which constantly expects innovation from founders and startups, has itself remained relatively static and resistant to change. But we are in the early stages of a long-overdue shakeup thanks to this new landscape of distributed opportunities. Stylistically, the pendulum has swung away from the trend of generalist, industry-agnostic, mega funds. Today’s emerging managers are working outside these traditionally dominating VC hubs and models, bringing new modes of connection between founders and funders and ultimately reshaping the ecosystem.