Venture capital (VC) fundraising statistics paint a challenging picture. According to recent data, VC fundraising in the first quarter of this year plummeted by 44.2% compared to Q1 2023, with the 2023 figure already being half of what it was in 2022. The last time first-quarter fundraising numbers were this low? 2015. Despite the downturn, firms with a solid foundation are still utilizing tools like sales tracking software to manage fundraising efforts, though many smaller firms are finding it harder to close funds.

While there are notable exceptions—such as General Catalyst and A16Z closing multi-billion-dollar funds—these success stories are far from the norm for most fund managers. This article will examine the contributing factors behind the current fundraising crunch and explore how emerging or smaller firms can still find pathways to success in this challenging landscape.

A Return to Pre-Pandemic Fundraising Norms

The past decade has seen the VC landscape evolve dramatically. Back in 2015, there were 1,519 VC firms, and funds were relatively small. For many Limited Partners (LPs), entering VC as an asset class was a challenge due to its niche and perceived risk.

The tech boom during the COVID-19 pandemic changed everything. By 2022, the average fund size had surged to $167 million, up 39% from 2019, and low-interest rates made private capital an attractive investment. This influx of capital led to the creation of numerous funds, with 3,417 firms operating by 2023.

However, recent data from Q1 2024 suggests a sharp recalibration. The average fund size has dropped to $115 million, mirroring pre-pandemic levels. While this shift back to smaller funds is partially a reflection of tighter capital markets, it is also indicative of the hyper-competitive environment that fund managers now face.

The Flight to Quality

The current fundraising environment, while difficult, is forcing a return to quality. Over the past few years, a mix of hype cycles and extremely low-interest rates created an environment where even less experienced fund managers found it easier to secure capital. In hindsight, this led to many startups being overfunded, which ultimately inflated valuations across the board.

Now, with valuations dropping and exits becoming rarer, LPs are more selective in their investments. Much of their capital remains tied up in previous portfolios, making it harder for newer or lower-performing VCs to attract funding. Those who can still invest are prioritizing established firms with strong track records, which has resulted in a flight to quality.

This trend may ultimately lead to more prudent investment decisions within the tech industry. As LPs seek to minimize risk, only those with proven success are likely to continue raising significant funds, while others may find themselves unable to secure another round.

Navigating the Fundraising Landscape

For new or emerging fund managers, raising capital in today’s market can seem daunting, but there are strategies that can increase the chances of success:

1. Start Building Relationships Early Fundraising is relationship-driven, and successful fundraising often stems from long-term connections. It’s rare to go from a new introduction to a closed deal in a short timeframe. Start cultivating relationships as early as possible, leveraging mutual connections, and nurturing these relationships over time. Establishing a network of trusted advisors can also help validate your fund’s brand and sway potential LPs.
2. Seek Investors in Uncommon Markets With local LPs becoming more cautious, some fund managers are turning to international markets to fill the fundraising gap. Expanding overseas may seem daunting, but modern relationship intelligence tools and deal flow management software can help uncover hidden connections and potential LPs through previous work experiences and networks.
3. Be Prepared for Rigorous LP Scrutiny Fundraising is now more difficult than ever, and LPs are asking tougher questions. They are increasingly scrutinizing funds, particularly when it comes to valuations. A valuation may look strong on paper, but if it’s based on an inflated round led by growth investors, it may not hold up under closer examination. To succeed, fund managers need to ensure their thesis is credible and be able to articulate why LPs should choose their fund over an established competitor.
4. Leverage Technology for Fundraising Insight While cultivating relationships is critical, leveraging the right technology can streamline the process. Tools like Preqin and Pitchbook allow fund managers to track LP activity worldwide and identify those who have invested in similar funds. Combined with a CRM system, these tools can help track outreach, streamline relationship management, and enhance team visibility—helping managers to stay organized and efficient throughout the fundraising process.

Conclusion: A Tale of Two Fundraising Experiences

Today’s venture capital fundraising market is bifurcated. While established firms continue to secure capital with relative ease, newer and smaller funds face a more uphill battle. Until we see a rise in tech exits and a renewed sense of optimism, many fund managers will continue to struggle in this tight market. However, with a combination of strong relationship-building strategies, the right use of technology, and a compelling investment thesis, even smaller firms can find a path to success.

Utilizing tools like deal flow management software will also play a crucial role in streamlining operations and staying competitive in this evolving VC landscape.