Silicon Valley Bank expands emerging-manager practice in NY

Silicon Valley Bank is in the hunt for the next crop of superstar venture capital managers.

The bank created, and is looking to fill, the role of managing director in the emerging-manager practice, working out of New York City to help the bank build ties to the young-manager community on the East Coast.

The bank formally launched its emerging-manager practice in September, led out of San Francisco by Jim Marshall, head of the emerging-manager practice, and Managing Director Tuan Pham. The bank has worked informally with emerging managers for many years.

The bank moved Managing Director Shai Goldman to New York City in 2014 to focus in part on building emerging-manager relationships, Marshall said. Now, the bank is expanding the team. The new New York managing director will focus solely on emerging managers, he said.

Critical mass

“The micro-VC space, or the emerging-manager space, has grown significantly,” Marshall said in a recent interview. There are now “over 300 emerging managers in the country and New York has over 75, which is basically 4x the number in Boston, and a little less than half of the Bay Area. So it’s really got enough critical mass now that the ecosystem has developed and is growing.”

The emerging-manager strategy has become quite popular in PE and VC. Limited partners desperately searching for yield try to find the next superstar investors. But the space is wide and crowded, and fundraising for the strategy has slowed in recent years as established managers taking advantage of the strong fundraising environment pushed aside their younger peers.

Alternative-assets-data provider Preqin reported that about 130 first-time PE and VC funds have raised $15.4 billion so far in 2016, compared with 207 first-time funds that raised $22.1 billion last year. Fundraising peaked in 2011, with $42.5 billion raised across 217 first-time funds, Preqin said. Preqin defines first-time funds as debut funds raised by new managers or by established managers raising first-time funds for particular strategies.

LPs like early funds because performance has traditionally been strong. Around half the top 10 top-quartile firms from 1994 to 2012 were Fund I and Fund II, according to research from consultant Cambridge Associates.

LPs’ appetite for access to early funds is strong and newer firms have exploded on the scene over the past few years, Marshall said.

“What’s happened is as existing traditional firms got larger and larger, these newer firms, generally sub-$100 million, really represent the new early stage in venture,” Marshall said. The newer firms “are often the most sought out investors for entrepreneurs looking to raise a first round of financing.”

Silicon Valley Bank said more first-time funds were raised in the past four years than previous years combined, with about $20 billion managed by more than 580 emerging managers globally, mostly focused on early-stage investing.

SVB defines emerging managers as firms with no more than three institutional funds with fund sizes under $150 million. The managers also should be sector, stage and check-size agnostic and likely have no full-time chief financial officer, according to SVB.

Advisory role

Many managers with whom the bank has worked have come from big tech firms. Fifteen of the emerging managers that became SVB clients came from Google, seven from Microsoft and five from Battery Ventures, according to SVB.

SVB’s emerging-manager clients usually fall into two groups: entrepreneur/founders who have done angel investing and decided to raise their own funds, and executives at larger venture firms who chose to spin out on their own, Marshall said.

So how does SVB work with emerging VCs? The bank sees itself as helping VCs get into business, advising on everything from fundraising to how to build the firm to how to invest in various strategies and build portfolios, he said.

The bank would not build back-office infrastructure for a firm, he said, but would connect the GP to people who can do that. Similarly, the bank wouldn’t run fundraising, but would help the VC “understand the LP landscape, figure out LP construction and what types of LPs they should approach given their strategy and focus,” Marshall said.

Action Item: Reach Jim Marshall at jmarshall@svb.com

Photo of Jim Marshall courtesy of Silicon Valley Bank