Roundtable 3 Recap: Financial Products for Venture Funds - Insights from SVB’s Jim Marshall

In the course of managing the day-to-day of a venture firm, it’s easy to overlook the strategic value banks provide.

Yet, banks can and should be more than a lender and transaction engine. In fact, a general partner's (GP's) relationship with their bank can be pivotal to the trajectory of their firm — banks act as connective tissue between different funds and GPs, giving them a unique view of the markets and a valuable perspective.

Flow’s invite-only audience had access to this very perspective during our latest Roundtable event, featuring Jim Marshall, Head of Emerging Manager Practice at Silicon Valley Bank. Marshall offered valuable insights for fund managers, observations on recent market trends, and his thoughts on how banks should support their GPs.

Your bank should be a strategic partner

It seems as though, overnight, many GPs' jobs have become far more difficult.

“Many have seen the industry in the last five years and thought, ‘This is easy,’ because everything has been up and to the right," says Marshall. "But it's really not an easy business, and now we're in one of those times where it's really important to think about your strategy."

Marshall urges VCs to turn to their banks for advice. A true banking partner has seen it all, and is seeing it all in the current market. They can provide macro-level guidance on strategy, portfolio construction, fundraising, and every other component necessary to set your firm up for long term success. 

The current market has clarified the importance of GPs as fiduciaries, not just networkers who can close deals. The ability to minimize risk, diversify a portfolio to weather different market conditions, and behave as a real investor is more important now than it was three months ago. Only GPs who prove their competence under pressure will be able to scale their funds to include institutional investors. 

"Even if you have a $5 million proof-of-concept fund, if you want to be in this business for the long run, you need to think about what it means to be institutional grade.” says Marshall. “That's what we bring to bear when working with our clients."

A great bank is no substitute for a great GP

While GPs should expect help and support from their banking partners, they should avoid leaning too much on anyone for help. Critically, first time fund managers must demonstrate an ability to attract and close capital from their own network before asking others for access. Ideally, they should raise their first fund themselves. 

Raising capital is an important display of competency and viability as a future GP; it’s a signal that carries weight and endows credibility. Once you’ve found success within your own network, your banking partner will soon begin to open doors to newer and greater possibilities.

Money isn’t everything, though. 

GPs must not only demonstrate the value of their networks, but also prove the validity of the thesis underlying their fund. Such proof can come in many forms: landing great deals; leading a round; attracting follow-on financing from credible firms; and/or having valuation markups. 

"At the end of the day, fundraising is about relationship building," says Marshall. "It's really important to have a long term view. LPs are not looking to invest in an illiquid asset class into an unproven manager."

Focus on building relationships and credibility; investor confidence will follow.

The markets have cooled, but they are hardly frozen

Compared to the red hot activity of the past decade, it might seem like the long winter has finally come. Yet, it’s not all doom-and-gloom in the private markets.

First, while Series A deals contracted YoY, seed stage deals increased in the same period. It turns out that cooling markets make it harder to price existing companies, but make it easier to fund new ones.

Second, firms have become more creative with where they raise capital, including both from overseas sources and from new vehicle types. These alternative capital sources have provided an important buffer against the slowdown.

Third, inflows into venture and private equity firms have still outpaced money flowing into the public markets. This dynamic is likely to continue for the foreseeable future. The growing number of venture firms provide more points of entry for capital – on a scale that was inconceivable in earlier downturns. "In 2000, this was not even a topic of consideration," says Marshall.

Still, the cooling markets have injected a sense of discipline that was missing over the bull run. GPs are now reevaluating the wisdom of yearly fund cycles, and many expect to transition to two or four year cycles. 

Portfolio strategies have also changed. In a downturn, companies focused on unit economics and smart growth are most likely to emerge victorious. GPs that are able to identify “camels” as opposed to “unicorns” are more likely to be successful.

There's no shame in staying small

Not unlike their portfolio companies, many emerging fund managers are tempted by the desire to grow at (almost) any cost. There’s a reason total assets under management (AUM) is often the only statistic found in a VC firm’s byline. But GPs should keep in mind that the leviathan trajectory is entirely optional, and may even be undesirable.

"Raising capital is hard, and scaling up like that is a totally different ball game," says Marshall. "It becomes less collaborative, more competitive." 

While there's an allure to such commanding heights, scale of that magnitude can make the job much less fulfilling for certain GPs. Many enter the industry to connect with founders and help grow great companies. Those GPs who do want to pursue size, should. But a GP should avoid growth for growth’s sake.

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Please note: The views expressed in this blog post are solely those of the author(s) and/or participant(s), and do not necessarily reflect the views of SVB Financial Group, Silicon Valley Bank, or any of its affiliates.