The Second Desert in Venture Capital

We talk a lot about how hard it is to get from Fund I to Fund IV - there's another desert on the other side for those who are successful.

I caught up with one of my favorite GP mentors over the holidays, and he asked me how things were going. I told him I felt like I was going through the second desert in building Precursor - I hadn’t planned to describe it that way, that’s just how it came out, and I think it really does capture where I feel I am at the moment. I couldn’t really articulate exactly what that meant or why I felt that way, but some things that happened in January helped me develop a better vocabulary for what this “second desert” thing is all about.

By now, I hope you have all read Beezer Clarkson’s excellent post on LinkedIn, “I See Dead VCs.” Beezer is one of the very first people I ever pitched when I was starting Precursor, and she has a very unique vantage point on the state of fund formation and what it takes to build a venture firm that stands the test of time. Most of the folks I know who read and commented on that post focused on the fact that only roughly 14% of venture funds get from Fund I to Fund IV - there is a very significant winnowing that happens from fund formation to graduation from the emerging manager pool. That’s a testament to how hard it is to get a venture firm off the ground and to stay in business in the early days.

As is often the case, what you focus on is a function of what you care about. I was less concerned about the graduation rate from Fund I to Fund IV, partly because we at Precursor are past that point and partly because it confirms what I’ve always believed: it’s really hard to stay in the venture capital business, and most folks don’t make it past the first few funds.

Most of the people I’ve gone to for advice on building Precursor describe two distinctly different phases of a firm's life. The first phase is about survival and getting your first few funds done. The second phase is what happens once you’re past that point, and the work feels quite different.

The First Desert (Funds I-III):

I do not want to trivialize the challenge of what I call the “first desert” - between my work at Screendoor, my own experience raising our first few funds, and the conversations I have with many fund managers who are trying to get their funds off the ground, the first desert is a brutal, challenging phase. It’s a phase that requires a lot of perseverance, persistence, and the ability to push through some nagging doubts about how good you might be at the job if you feel like you’re doing well, but the data hasn’t yet borne it out. A handful of things that come up whenever I talk to folks who are going through this phase:

• What is our right to win? Why does our firm exist?

• Who are the LPs who understand and believe in my vision? How can I find them?

• Do I have what it takes to go all the way and build a great venture capital firm?

• How do I balance fund operations, new investments, supporting the portfolio, and getting to know LPs?

• Will we have the data and other artifacts that LPs care about to raise our next fund?

• What will I do if this doesn’t work out?

As challenging as this phase is these days, there is more support than ever for entrepreneurial fund managers who want to build new institutions. Organizations like RAISE and Emerging Manager Circle, and LPs like Screendoor, are doing a lot to create supportive communities and provide capital to people building new firms who want to be among like-minded peers.

The first desert is all about survival - get the next fund done, get better at running your firm, learn a thing or two about the venture business, and keep showing up so LPs believe you will be around in the future.

The Second Desert (Funds IV-VII)

About a year ago, I wrote a post that, in some ways, is what kicked off all of this thinking about the second desert:

No Longer Emerging, Not Yet Established

I’ve had many opportunities to reflect on why this liminal phase feels so unsettling and different from the first desert, as well as to talk to friends who have been on this journey themselves. I have some early thoughts on what makes this second phase unique and, at times, unsettling.

In this second phase, you no longer have the problems you had as an emerging manager. By and large, the startup phase of your fund is over. You’ve figured out how to balance all of the demands on your time and build a firm that works for you and your LPs. Things that stressed you out in Funds I through III feel more or less settled or (at a minimum) significantly less stressful than they did when you started. As a result, you have more time and energy to focus on other things.

You also have some LP relationships that feel strong enough that you don’t start every fundraise from scratch. Getting to the second desert means you’ve figured out some of the nuances of managing LP relationships, and you have a set of core supporters as well as a network of prospective LPs that you’ve gotten to know across multiple fundraises. Also, given that you’ve made it this far, you’ve been able to successfully fundraise multiple times and are likely better at that part of the job than you once were.

In this new era, you might not yet feel like an “established” fund manager. When I talk to most of my GP friends about what it means to feel established, it often correlates with the ability to fundraise with significantly less friction than you did when you were an emerging manager. Depending on a given fund’s LP base and the climate, even relatively established funds can still feel like fundraising is really hard, and what “established” means can feel very ambiguous. It can feel like the payoff for being “established” is unclear; the only thing you know for sure is that you are no longer in the emerging manager category. Externally, though, you will find many people who will likely think you’ve made it and things are easier for you now than they once were.

Because so few fund managers make it to the second desert, many of the folks who were your colleagues and peers when you were starting won’t make it there with you. The early, supportive community of fund managers that you had in your emerging manager days thins out as people’s strategies change, and some of your good friends either choose not to continue raising funds or are unable to do so. The pool of people who are going through what you’re experiencing gets very small, very quickly. Talking to your friends who are in truly established firms isn’t always helpful, as they, too, are in a different place than you are.

One of the most surprising things for me is that many of the folks who provided me guidance and mentorship early in my career have become less active in the venture business or have less to offer about this phase of the journey. This isn’t a criticism, but more of an observation. By the time you get to the second desert, many of the folks who helped and advised you in the beginning will be less involved in the business or doing it in a different way that suits them better, but is potentially less aligned with the questions you have and the advice you seek. I find myself searching for a new set of advisors who know how to navigate this phase of firm building and who are still actively engaged in it.

Finally, most of the questions are about the firm and not the next fund. There will always be questions about what it takes to raise the next fund, which LPs will come back, which companies will deliver the core returns, etc. But in the second desert, many more of the questions are about firm longevity, succession, and other longer-term issues that feel very far off when you are first getting started.

There really are some parts of the second desert that feel exciting and energizing; the knowledge that you’ve made it this far and built a firm that can raise multiple funds, feeling more confident in yourself as a fund manager, and hopefully some early concrete signals that you are good at this job. But that’s managed by some level of uncertainty about what the next phase entails, whether you have what it takes to make it through the next phase of firm building, and sometimes the fear that you’ll lose the thing you’ve worked so hard to build. This business is never easy, and I, for one, am looking forward to exploring what this second desert has to offer.