It Was Oddly Harder to Raise a New VC Fund in 2021. Here How 3 Did It.

• In 2021, 198 inaugural funds closed — on par with last year’s 191 but way down from 2019’s 315.
• There’s only so much money to go around, and existing firms are gobbling it up.
• VCs said it sometimes took as long as two years to fundraise, even with decades of tech experience.

With US venture firms hauling in a record $128 billion last year from investors, according to PitchBook, it was a splendid time to be a venture capitalist. But there was a big exception: those who were raising a brand-new, first-time fund.

Far fewer of those closed than did before the pandemic: 198 inaugural funds closed in 2021, according to PitchBook data compiled for Insider — on par with 191 in 2020 but way down from 315 new funds in 2019.

Ironically, the tremendous success of venture firms in recent years is making it tougher to launch a new fund. In these boom times, established firms are raising far larger amounts — sometimes by billions of dollars — and gobbling up money from the biggest investors (known as limited partners, or LPs) like the endowments and pension funds that fuel the venture industry.

“For an LP with a full portfolio of existing managers to swap someone out and do a new fund means that LP will have to believe this new relationship will outperform an existing fund,” said Beezer Clarkson, who leads Sapphire Partners’ investments in venture funds. “That can be a really high bar.”

Ed Fries was a video-game executive at Microsoft for nearly two decades before he set out to launch his own gaming-focused venture firm, 1Up Ventures. Despite having served on boards and advised venture-funded startups, Fries’ lack of direct VC experience made it difficult to raise money, he said.

“I had two years to do the final close, and I finished raising the money the final week, two years after I started the fund, so I’d say it was harder than I expected,” Fries said.

Looking back, Fries said his inexperience caused him to make a common mistake: His initial minimum investment of $1 million was too ambitious.

“When I lowered it to $250,000 and finally to $100,000, it really helped me fill out the fund,” Fries said.

Two other first-time VCs also said they’d been warned that fundraising would be challenging. One said that winning that initial check was hard.

“The first checks were definitely the toughest when there really isn’t anyone else that has made the investment in the fund,” said Adarsh Bhatt, who raised $5.5 million for Comma Capital.

Bhatt said that rather than outright rejections, the most common responses were “Keep us posted” and “We’ll have to think about that.”

“It’s basically like people were just kicking the can down the road,” Bhatt said.

For Thomas Chen, a general partner at Magic Fund, soliciting the first $15 million from his close circle of colleagues and friends was the easiest part, he said. Then things slowed down.

“Because we were are able to raise the first chunk very quickly, I think we definitely took our foot off the pedal,” Chen said. “We began to tap out of our immediate network and had to start talking to potential LPs who we had no prior relationships with.”

Magic was eventually able to get high-profile commitments from Tim Draper, Michael Seibel, and Tiger Global, convincing other LPs sitting on the fence to join.

All three first-time VCs said that once they landed a big-name LP, they became crucial allies in landing other LPs.

“I had a great first investor with a Korean game company that put in the first $10 million and encouraged me to start investing right away and raise money as I went along,” Fries said. “They helped me find my second big LP, and the rest slowly followed.”

They said LPs would also sometimes put in more money than they originally committed.

“Be very communicative with your LPs on progress,” Chen said, “and many of them will actually end up giving you more capital if they like what they are seeing.”