Realistic fundraising targets for emerging venture funds

Follow me @samirkaji for my random, sometimes relevant thoughts on the world of early stage venture and start-ups.

The recent article I posted about the current fundraising environment focused primarily on the macro conditions driving limited partner appetite into emerging fund managers, which of course, are nearly impossible to control or predict with any effectiveness.

While market conditions are uncontrollable, it’s critical that managers thoughtfully construct strategies that optimize the probability of a successful raise .

Drawing from my experience having worked with over 300 emerging fund managers during their fundraising efforts over the last 6 years, I’ll be focusing my next few posts on some of the important elements of ensuring a successful raise.

One of the difficult exercises for fund managers is getting the right fundraising target right, as setting a target too high or too low comes with risks:

Too high:

· Generally necessary for the fund to hold a significant first close to show viability of model to both first close and later close investors.

· Risk of an offering getting stale if the market doesn’t respond favorably and relatively quickly. Reducing a target mid-way through fundraise is as painful as it sounds.

· Loss of credibility if target is not congruent with market realities.

· High opportunity cost (doing deals) of a protracted fundraising cycle.

Too low:

· Can eliminate certain classes of limited partners (institutional)

· Fund size doesn’t allow for the optimal fund construction to execute a given strategy

· Fees from a small fund may not provide sufficient fees to execute on thesis, or incentivize manager enough.

· LP’s may equate those with overly modest targets as “venture capitalists in training”

Setting the right target is a delicate balance between market realities and a lucid understanding of one’s business model and what is needed to create an optimal economic framework for all constituents of a firm. For example, it doesn’t make much sense for a post-seed focused manager to raise only a$10MM. Similarly, a sole GP manager with a limited track record is unlikely to be successfully if he/she sets a target of $100MM.

*Quick aside note for managers: avoid the urge to adopt the business model of prospective limited partners as your own. Just because an endowment or pension suggests that you should be $100MM (because they need to write a $10MM-$20MM check to be worthwhile), it doesn’t mean it’s the right (or realistic) target. I see far too many managers still follow into this trap.

Rather, it’s best to brutally take inventory of your current profile and needs, and stress test it against market conditions.

As I don’t know the specific profile of every fund manager reading this, I’ll instead outline what I think is generally realistic today in terms of fund targets for emerging managers (I recognize outliers will always exist):

Category 1: $5MM-$25MM total fund size

- First time fund manager with no prior institutional investing experience but with reasonable angel investing or operating backgrounds

- Fund II offering, with a small step-up for those that raise Fund I’s on the smaller end of range above.

Category 2: $15MM-$30MM per partner

- First time fund, but whereby one or more GP’s has institutional, albeit limited, investing experience — e.g. general partner(s) that has some prior institutional investing experience (principal/associate at another firm)

- Fund II offering for managers from category 1 that raised funds on higher end of that category range.

Category 3: $30MM-$75MM+/partner

- First time fund, but where one more general partners on team have established track records as lead partners with verifiable attribution at prior firms.

- Fund III+ offerings for Category 1, and Fund II+ offerings from category 2.

Of course it goes without saying that there are many other variables that speak to the viability of a given fund size target (differentiation level, strategy, level of prior performance, team mix, other forms of capital access) and as a result, the above is simply meant to be levered as a framework of what is generally possible in the current fundraising conditions.

In my next post, I’ll touch on the different type of LP’s that engage and allocate to emerging managers at each category type.