Emerging fund managers have had a tough time these past few years, and there is no telling when it will get better.
Still, some were able to brace the market’s winter. One of those was Gale Wilkinson, a managing partner at the early-stage fund Vitalize. Her firm just closed a $23.4 million Fund II after two years of fundraising. She called the experience “enlightening.”
She plans to use that money to invest in at least 30 companies and has already cut checks to 50 from earlier capital pools. Her firm, founded in 2018, focuses on future-of-work technology. It typically writes seed checks between $250,000 and $750,000 and has an angel network that has deployed just over a million dollars in 14 deals.
Wilkinson has no plans to raise a third fund anytime soon but has some advice for those who are, given the looming uncertainty in the venture market. She spoke to TechCrunch+ about why she no longer wants to work with institutional investors, what to do when an LP says no, and why she no longer aims to raise $100 million funds.
TC: This hasn’t been the easiest year to fundraise for many firms or founders. What were some of the big lessons you learned trying to court limited partners this year?
GW: I made one key error, which was to listen to everyone else when developing the strategy for Fund 2. They said to raise more, go after institutional capital, deploy faster, write bigger checks, do fewer deals, get more ownership per deal, and build out a bigger team to set the stage for further expansion in the future. Initially, I listened and went out to raise $50 million with the expectation of someday getting to a fund size of $100 million, which I think is about the largest seed-stage fund a VC should raise.
After 300 conversations with institutional LPs, I had an aha moment in which I realized that I did not want to primarily work with institutions in the future. For over a decade, I have worked with individual investors, and it’s part of what I love most about this job. Individual investors are very different from institutional investors in all the right ways, in my opinion. Individuals are willing to make their own decisions versus just following the pack; they are adept at looking into the future, and they move fast.
A larger fund also means deploying more dollars per company. A fund of funds partner who did diligence on our fund at the beginning of our raise questioned if we would be able to win larger allocations in seed rounds. This is a fair point, and I am grateful for the honest feedback. We are not a lead VC but rather typically co-invest alongside a lead. Over the past decade, we have built a network of 850 co-investors, many of whom send us the deals they are doing because they know our check size is a fit, we run a good yet fast diligence process, and we are a value-add investor in WorkTech deals.
So I had to ask myself, “Why would I want to give up this position we have worked so hard to build and start to compete with our friends for deals rather than get invited into their great deals?” There is an expectation that bigger is better, and you have to keep doing more, more, more. I said enough is enough — we are great at executing on a small seed fund strategy, so let’s keep doing it. Our plan is to raise around $25 million fund every four years, as long as we are tracking to and delivering on at least a 3x net return to our LPs, which is top 25% performance.
As a bonus, we can stick with individual investors to raise this size of fund.
LPs usually want the same network. What is that network, and how can people who aren’t in it break through?
We did have two amazing institutional investors join the round, and there are a few on our update list who we would love to work with. However, our experience with most LPs was a bit rough. Most first conversations went well, and the LPs seemed genuinely interested in what we are doing. About 25% asked to see our data room.
From there, things went downhill. I never heard back from most of the LPs who asked to see our data room despite multiple follow-ups.
Among the several dozen who did full due diligence, we received nos for a slew of reasons: Looking for more ownership concentration; not taking on any new managers right now; don’t think the Vitalize team has enough experience and want to watch for the next fund; Vitalize is not as institutional as other funds in terms of assisting portfolio companies; other emerging managers are farther along in their raises.
I’d argue that those with responses 1 and 2 should not have asked for the data rooms if they knew there was zero chance of investing. For responses 3, 4, and 5, I was so confused initially because I have over a decade of experience and have seen way more than most emerging managers; remember that they know I’m considered an emerging manager before they took the first call, so this was not a surprise. At first this LP told us they were passing because the economic conditions had changed and they needed to use their dry powder for venture debt deals. When I asked some follow-up questions, they then fumbled around with a few other reasons, including this one, even though I already had a decent amount of the fund closed at this point.
We have an automatic way to track every connection we make for our founders, which is 10 assists per company per year on average. We are actually quite advanced for a small fund in terms of helping our companies so this one was just laughable.
If I read between the lines of these responses plus so many of the questions I got on diligence calls, i.e., what other funds do you co-invest with? Who are your VIP limited partners? what big-time execs are in your network?), I can see that perception of network strength is truly at the core of a yes or no decision.
At Vitalize, we have a unique and diverse network, and it’s not the typical FAANG or Silicon Valley startup bro network. Institutional LPs chase Sequoia positions and spin-outs of the most popular funds because they are convinced this is the only place to find good deals. This is how 90% of institutional LPs invest their dollars.
I could argue this is insane because nearly everyone is chasing the same thing, which inflates prices and eventually kills all value. Do you remember 2020–2021? This is exactly what happened, with institutional LPs as the enablers of the market going haywire with hyped deals in those “popular” networks.
I’d suggest to fund managers who aren’t in this network, myself included, to really lean into contrarian approaches and networks that are authentic to them. Realize that sometimes the bridges have to be torched to build new, more authentic and valuable ones. Doing something different is scary because people may think you’re nuts, but it’s always the ones who stray from the pack who have the potential to make real impact and real money.
What do you do when an LP reverses their decision after initially signing on to invest?
This happened four times — with three institutions and one individual. One of the institutions called me and said their funding was cut, and we had a very adult conversation. I thanked him and will absolutely stay in touch and consider working with them in the future. The other two institutional LPs ghosted. One had even asked me to sign an agreement saving a spot in our last closing for them! Luckily, none of these LPs had officially closed, so I just lost $2 million of hard commits.
The individual investor did sign subscription agreements over the summer and just never responded when capital was called. He finally emailed me a note last month saying that he cannot fund his commitment and would like to vacate his position. I had our attorney draft up a letter to release him of his obligation. I asked him to cover half the cost of the document ($600), and he can no longer be found. I know he reneged on at least one other fund. The lesson? Be very careful who invests in your fund!
How are you anticipating LPs to respond to the downturn of last year, and how can everyone be prepared?
I am actually quite surprised we aren’t talking more about this. I think 2024 will be more of the same that we saw in 2023, with VC funding down. I believe institutional LPs will move a lot of their investable assets to “safer” options after feeling a lot of pain the past two years in venture. This will have a ripple effect that will be quite large — fund of funds won’t be able to raise. This is already happening — and large VCs will see their fund sizes cut by 50% or maybe more. Corporates are dealing with their own balance sheet issues. So this leaves a dearth of capital.
There will be a thinning of the middle set of VCs — $100 million to $1 billion fund sizes. Capital will be concentrated in a handful of multistage firms, and yes, LPs will continue to pile their money into these few firms so their fund sizes will get even larger. My bets are on Sequoia, a16z, Accel, and Khosla to be the winners. On the opposite end of the spectrum, the long tail of small funds will be massive. Funds that are $5 million to $50 million in size will explode in the coming years as individuals become the primary source of funding at the early stage. There is currently a bill in the Senate that now has bipartisan support and will further enable this trend of individuals investing in funds. The Expanding American Entrepreneurship Act will raise the permissible size of exempt 3c1 funds from $10 million to $50 million, and the number of permitted investors from 250 to 500. I expect this will pass within the next year.
After your experiences with LPs this year, are you more for individual or institutional checks?
Individuals, of course. I have 350 LPs who are on the update list for my next fund — ~50 are family offices, ~100 are institutions, and ~200 are high-net-worth individuals.
However, I will say that I am glad that some of my peers do raise from institutions and have different strategies than I do. I am not one of those VCs who will tell you there is only one way to do things in this industry. I actually believe diversity in thought, approach, and network is where the alpha lies. So even though I prefer individual investors, I don’t want the institutional investors to be too upset, because they will always play an important role in the ecosystem.
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