First-Time VCs Hit a Fund II Wall: Navigating the New VC Landscape

Launching a first VC fund in 2021 likely gave many first time and emerging managers a false perception of raising capital—$24.1B poured in, according to PitchBook. But 2025’s a different story: only 33% of 2021’s first-time VCs and 12% of 2022’s have raised a Fund II. Economic uncertainty and LP focus on established funds create a “tale of two worlds,” with 12 big VCs hoarding over 50% of 2025’s capital.

For emerging managers, this slump means tougher fundraising and structuring challenges. Limited partners want proven access to “power law” startups, leaving new VCs in a bind.*

In a previous post, we discussed how smaller LPs face adverse selection risk, where larger traditional LPs secure quality commitments leaving smaller LPs to choose from alts that have already been picked over. Similarly, emerging managers face adverse selection risk when competing to be the preferred partner to tier 1 founders. And to make it even more complicated, the cost of service providers for venture funds, from lawyers to fund administrators to compliance consultants is soaring into the stratosphere. Many emerging managers are saddled with navigating what they are least interested in, shopping for the optimal team of service providers while wondering why the cost of TVs on a per inch and per pound basis have cratered when service provider economics are trending the other direction.

At Sabal Law, we believe AI and other B2B SaaS products are presenting an “iPhone” moment not a “newton” disappointment for securities lawyers. We expect high quality attorneys to use these tools to launch boutique firms with crammed-down cost structures that will result in services being offered at around 35% of the average billable rate of an AmLaw 100 equity partner.

Sabal Law PLLC brings insights to the table forged in the crucible of being a regulator, representing GPs with novel strategies, and negotiating investments around the globe for LPs. We guide emerging managers through fund formation, from PPMs to LP agreements, while representing LPs to ensure alignment. Our incubator platform offers flexible fee structures, easing cash flow for first-time and non-U.S. managers in venture capital and private funds. Schedule a Consultation to turn your Fund II vision into reality!

*Meaning of "Power Law" – Definition: In venture capital (VC), the "power law" refers to a statistical distribution where a small number of investments (or companies) generate the vast majority of returns for a VC fund, while most investments yield minimal or no returns. This is often described as an "80/20 rule" on steroids, where, for example, 10% of portfolio companies might account for 90% of the fund’s profits. The term comes from a mathematical power law distribution, where outcomes are highly skewed (e.g., a few "home run" startups like Uber or Airbnb drive outsized returns).