Fundraising has gotten increasingly tough over the last year for funds of all stripes, and especially so for emerging managers. In the first quarter of 2023, venture firms led by up and coming managers raised $1.62 billion, a mere 13% of the total capital raised in the U.S., according to PitchBook.
Emerging managers and new funds out in the market may find it tempting in this macro environment to hold a first close as soon as LP capital is in the door. But that may not be the best strategy in the long run.
Holding a first close comes with a lot of nuance and shouldn’t be rushed, feels Kari Harris, a partner at law firm Mintz who advises VC firms on fundraising. According to Harris, while holding a first close allows a firm to start charging management fees and can be perceived as a vote of confidence to draw in institutional or larger LPs, doing it too early may result in avoidable issues down the road.
Getting the first close timing right is important for a few reasons. For one, that is when a firm’s partnership agreement starts and kicks off a fund’s investment period. So, a firm should plan to be ready to start backing deals immediately after the first close to make the most of its investment period and avoid having to amend it down the line.
Harris’ biggest piece of advice is to make a plan or schedule for the fundraising process and future closes, but to keep the timeline relatively vague when talking to potential backers. However, she doesn’t mean you should be deceptive — rather, firms should ensure they don’t put themselves on timelines they won’t be able to make.