The VC Bottleneck: Why Emerging Managers Face a Defining Moment
Emerging VC firms face a crisis of capital, competition, and timing—reshaping the future of venture capital and the diversity of innovation leadership.
Introduction: A Crisis in the Making
The venture capital ecosystem, long dominated by stalwart firms like Sequoia Capital and Andreessen Horowitz, is undergoing a structural shift—and the tremors are being felt most acutely by its newest participants. Emerging managers—those running first, second, or third funds—are experiencing a historic downturn in fundraising, threatening not only the viability of their firms but the diversity, innovation, and evolution of the entire VC landscape.
As macroeconomic headwinds persist, investors retreat from riskier bets, and political uncertainty affects traditional LPs like universities and foundations, the window for first-time and smaller fund managers is closing. “There are definitely more headwinds than tailwinds right now for emerging managers,” said Kristina Shen in Bloomberg, co-founder of Chemistry and a former general partner at Andreessen Horowitz. “You have to be smart.”
This article explores the causes, consequences, and potential outcomes of this defining moment for new VCs—and what it means for the future of innovation.
The Numbers: A Rapid Fall from Grace
In 2021, U.S. emerging VC managers raised an all-time high of $64 billion. Just four years later, that figure is projected to fall below $10 billion. According to PitchBook, emerging managers raised only $4.7 billion through May 2025—on track to mark the lowest total in over a decade.
For first-time fund managers, the figures are even bleaker. They’ve raised just $1.1 billion so far in 2025, compared to $6 billion in 2024 and a record $24 billion in 2021. These statistics are more than just numbers—they represent dozens, if not hundreds, of fund managers who may never get another chance.
“The fundraising drought could spell the end for many new venture firms before they ever really got started,” the article notes.
Why It’s Happening: Economic, Political, and Structural Pressures
Several converging forces are causing this drought:
1. Macroeconomic Headwinds
High interest rates have shifted LP appetites toward safer, yield-generating investments like bonds and away from long-horizon, illiquid asset classes like venture capital. “It’s going to be a very tricky moment to fundraise,” said Maria Palma, a general partner at Freestyle Capital. “You can never rest on your laurels.”
2. Endowment and Foundation Pullback
University endowments, once a reliable source of capital for emerging funds, are under increasing scrutiny from politicians. Congressional pressure, especially from House Republicans and Trump-aligned initiatives, has targeted these institutions’ tax-exempt status and spending behavior—resulting in more conservative asset allocation strategies.
3. Overexposure and Liquidity Crunch
Many LPs find themselves “overexposed” to venture capital after years of delayed IPOs and a dearth of exits. “Some long-time investors have found themselves overexposed to VC bets that have yet to pay off,” the article observes.
A Defined Benefit Solution for Capital Constraints
While many LPs retreat, some venture firms are exploring innovative structuring tools to unlock capital from an overlooked source: defined benefit pension plans. These vehicles provide long-term, stable capital—and when structured properly, can offer LPs both upside and security.
“Defined benefit plans are a sleeping giant for emerging funds,” says Robert Mowry, partner at Defined Benefits. “They offer consistent contributions, tax advantages, and—critically—a long-term horizon that’s ideal for venture investing.”
By helping family offices and business-owning LPs establish IRS-compliant DB plans with guaranteed retirement payouts, firms like Defined Benefits make it possible to redirect capital that would otherwise sit in low-yield assets. “What we’ve seen is that when LPs understand they can commit to a venture fund and guarantee their own retirement income, it changes the conversation,” Mowry adds. “It reframes risk in a way that builds confidence—especially for new managers.”
The Consequences: Consolidation and Lost Talent
1. Silent Deaths of Funds
Most emerging managers don't announce their struggles. Their funds simply stop raising. They disappear quietly—joining larger firms, changing careers, or shutting down operations. A rare exception is Countdown Capital, which openly closed its doors earlier this year, citing competition from multi-stage mega funds.
2. Consolidation of Power
With smaller players exiting, dominant firms get even more entrenched. Big-name funds, despite trimming their targets (e.g., Tiger Global, Insight Partners), still draw capital due to brand safety and past performance. “Backing a big-name firm can ‘provide coverage’ for an investor,” noted Earnest Sweat, co-host of Swimming with Allocators. “Because of brand and being a founder magnet, they are going to see a certain amount of deals.”
3. Setback for Diversity
The stakes go beyond economics. From 2019 to 2022, the VC world saw unprecedented gains in racial and gender diversity—mostly through emerging funds. But those same funds are now the most vulnerable. “There was a period … when investors from underrepresented backgrounds made strides,” said Charles Hudson of Precursor Ventures. “Those new entrants were victims of bad timing.”
Bright Spots: Strategic Positioning for the Next Cycle
Despite the dismal environment, some emerging managers are optimistic. The absence of frothy valuations may allow them to build leaner, stronger portfolios.
“With us being a newer fund, we are able to build a portfolio of those well-priced, appropriately priced, assets and grow with them over time,” said Marco DeMeireles of Ansa Capital, from the Bloomberg article, which recently closed a $132 million fund.
Allan Jean-Baptiste, his co-founder and a former investor at CapitalG and KKR, added, “Your portfolio needs to perform for your fund to persist.” In other words, unlike legacy funds with deep reserves, newcomers have no safety net—performance is existential.
What Comes Next: Possible Futures
1. Barbell Effect
We may be headed toward a “barbell” market: capital flows to either the largest, most established firms or the leanest, highest-performing emerging funds. Mid-sized funds—especially those without a differentiated thesis—risk extinction.
2. Return of Niche Funds
As mega-funds pull back from the early-stage space or over-index on later rounds, LPs may rediscover the value of niche emerging managers with specialized expertise in areas like climate tech, vertical SaaS, or community-based investing.
3. Policy and Structural Reform
The downturn might prompt institutional LPs to reconsider how they allocate to new talent. Structures like seeding platforms, revenue-sharing arrangements, or even government-matched capital pools could revive the funnel for new GPs.
Why This Moment Matters
The future of venture capital depends on more than the survival of its legacy institutions. It hinges on its ability to replenish itself—through new voices, new visions, and new managers.
“There will be people who survive and thrive,” said Charles Hudson. But without intentional support from LPs, policy shifts, and capital willing to take the long view, many more will not.
What’s at stake is more than startup funding. It’s who gets to shape the future of innovation—and who is permanently left out.
Let this be a call to action—for allocators to fund the future, not just the past. The cost of inaction is not just measured in basis points, but in lost ideas, stalled innovation, and the narrowing of possibility.