6 first-time funds see an advantage in entering a downturn without a large portfolio

Who will fare better in the current venture downturn?

Will it be the legacy investors with years of experience amassed through multiple market cycles — but who also have a sizable portfolio to worry about — or the emerging managers who are looking at the market with fresh eyes and a clean slate? We’re about to find out.

Last year saw a record 270 first-time funds close, according to PitchBook data, which means there are almost 300 emerging managers who raised their fund in a bull market and are now deploying it in very different market conditions.

We polled six first-time funds to better understand how this group of investors is navigating the downturn.

Several first-time fund managers, like Giuseppe Stuto, co-founder and managing partner of 186 Ventures, a Boston-based early-stage generalist fund, told TechCrunch that entering the downturn with a very small existing portfolio could serve as a big advantage.

“We don’t carry any of the baggage that may come with having previous funds or having a lot of capital tied up in what seems to be highly overpriced vintages,” Stuto said. “Just like a founder, who looks at the world differently than subject matter experts, we (first-time managers) bring a fresh outlook of how certain problems and industries are developing.”

Leslie Feinzaig, the founder and CEO at Graham & Walker, a fund that backs early-stage digital startups, added that even though she started investing her fund during the bull market last year, focusing on a company’s potential downstream risk was crucial — as a first-time fund manager, she couldn’t jeopardize her budding track record in any way.

“The big advantage is that we don’t have many prior investments that are now high risk, and we don’t need to focus as much of our time on triaging the portfolio,” Feinzaig said. “I can focus almost entirely on the path ahead.”

Because these investors have a smaller garden to tend, as they say, they can focus more on making sure the new companies they add to the portfolio are more resilient against current market trends.

One thing these managers are better equipped to help their portfolio plan for is runway. Stuto said that when 186 Ventures started investing in the fleeting days of the bull market, extension financing wasn’t a big part of the conversation, but now that it is clear that will be a challenge for startups, 186 Ventures plans to focus more on making sure its investments allow for a much longer runway.

“Bridge financing was readily available last year, so it was easy to hand-wave whether you’d be able to attract new investors at a ‘slight’ up round,” he said. “Part of our thesis now is that this bridge financing will likely not be as available, so depending on the industry and who the other financing partners are in the round, we have increased our ‘market readiness’ threshold.”

Ariana Thacker, the founder and solo GP at Conscience VC, agreed and said while she’s still looking for the same kinds of startups, she is definitely putting an emphasis on deals that result in the company having 24 to 36 months of runway.

Read the full survey here to get their full take on what they’re doing to prepare for the downturn, how their approach to investing has changed, and how to pitch them.

6 first-time fund managers detail how they’re preparing to thrive during the downturn

Until a few months ago, the venture market was on a historic bull run that lasted for the better part of a decade. Many new investors and funds entered the fray, but the last few years also saw a proliferation of new venture firms. That trend came to a peak in 2021, when 270 first-time funds raised a collective $16.8 billion, according to PitchBook data.

That means there are now nearly 300 firms in the U.S. alone that raised their debut fund in the bull market and are finding themselves operating in very different market conditions today.

Over the past few months, many established investors have been quick to speculate that many of these new funds will struggle as markets worsen, even if they can survive. But these legacy VCs are forgetting that the new entrants don’t have to think about an existing portfolio with dozens of startups before making each decision.

We’re widening our lens, looking for more — and more diverse — investors to include in TechCrunch surveys where we poll top professionals about challenges in their industry.

If you’re an investor who’d like to participate in future surveys, fill out this form.

What’s keeping these first-time fund managers up at night isn’t their chances of survival or if they’ll raise a second fund, but rather how to best manage their time and assets in a seemingly volatile market. “The biggest challenge has been around scaling my team’s time, particularly around managing a growing portfolio at a time when founder support is critical,” said Ariana Thacker, founder of Conscience VC.

Several such investors, like Rex Salisbury, founding partner of Cambrian, said the downturn is actually a good thing for new funds given their long-term goals: “The current macro environment is causing the most pain at the Series B and beyond. But the exit environment that matters to a fund like ours, which is investing very early, is more than seven years in the future,” he said. “So, price compression in the short term, which is just starting to trickle down to the early stages of the venture market, is, if anything, a tailwind.”

That’s not to say these VCs aren’t being cautious about what they’re willing to bet on. “Our process for assessing companies has not changed, but we have certainly recalibrated our compass on assessing the current, instead of the future projected value of the companies we are considering investing in,” said Giuseppe Stuto, co-founder and managing partner, 186 Ventures.

“It makes sense for us to be more thoughtful than we already were with regard to portfolio construction and make sure we are not over-levered in any one vintage or ‘company stage’ pricing, e.g., 2021, pre-product, pre-revenue,” he said.

So how are these first-time fund managers going to fare? TechCrunch+ asked six of them to find out how they’re preparing to tackle this volatile market, how this environment has changed their approach to investments and raising Fund II, the best way to pitch them and more.

We spoke with:

Giuseppe Stuto, co-founder and managing partner, 186 Ventures

How would you describe your fund’s thesis and structure?

We are a $37 million pre-seed and seed-stage fund focused on multiple industry groups — fintech, web3, enterprise SaaS, digital health and consumer-based innovations. Although we are geographically agnostic, we anticipate most of Fund I’s investments will be U.S. based (we have only one based internationally today in Nigeria).

Our strategy is that of a seed-stage generalist. That said, we consider our edge to be our ability to provide pragmatic “0 to 1” company growth know-how, given our founder/operator backgrounds and access to a network of industry leaders across multiple industries.

We have a traditional VC vehicle structure on a 10-year life cycle. The team today is composed of three full-time staff — myself (founder, investment team), Julian Fialkow (founder, investment team), and Sophie Panarese (platform and ops).

How are you preparing for the current, more conservative market conditions after raising a first-time fund in a bull market?

We like to think that we’ve been consistent in how we source and consider investment opportunities through both the bull market and the current market.

We started investing in September 2021, so we have a fair amount of bull market investing under our belt (about 10 of our 11 investments were completed during bull market times). We have two outstanding commitments, so we anticipate that by the end of August, we will have completed at least three investments after the bull market.

Our process for assessing companies has not changed, but we have certainly recalibrated our compass on assessing the current instead of the future projected value of the companies we are considering investing in.