Capital is a great amplifier. When great ideas meet the right people, the proper application of capital helps startups commercialize incredible products and services. The great news: there is an increasing number of talented, mission-driven emerging managers entering the venture space. These emerging managers possess the following:
- The authentic desire to enrich the startup ecosystem by building lasting relationships, and effectively deploying capital to support founders and their teams.
- Empathy, which enables them to resonate with founders and their teams.
- First-hand operational experience, as a founder or an executive.
- Strong recognition of the importance of helping investors (Limited Partners, LPs) realize returns on their investment.
If you are a first-time emerging manager raising (or about to) your first fund, this post will help you:
- Manage your energy and expectations.
- Plan your priorities.
- Clarify and speed-up your decision-making on key action items.
- Reduce friction in your fundraising process.
1: Have a Clear Personal ‘Why’
Deploying capital can be one of the most rewarding experiences. However, first-time emerging managers have their work cut out for them. Recently, TechCrunch published a piece called The Fight for Seed, covering the changing landscape of Seed funding, in particular, the increasing amount of competition for Seed deals from larger, established venture funds. A few key themes from that post:
- Many founders select their investors based on the partners first, not just the brand name.
- Founders appreciate and value hands-on, responsive, and thoughtful support — something smaller teams and funds are happier and more able to provide at the seed stage.
- Seed funds must differentiate themselves on two fronts: 1) Personal leadership and influence, 2) Value-add model (recall: today, founders demand more than capital from their investors).
Subsequently, there is an incredible opportunity for emerging managers to differentiate themselves in the early-stage venture space by building trust and scaling their capacity to deliver a ‘hands-on’ touch. But raising a fund requires a lot of effort. Therefore, it is just as essential to ensure you are clear about why you want to build a fund and what specifically about it inspires you. Your motivation must be intrinsic. Take some time to reflect on these questions:
- Why do you want to start a venture fund?
- What good thing comes to you and others when you raise a fund?
- If not venture, what else would you consider doing?
2: General Partners (GPs) Must Take the Lead
How do you eventually gain the trust and confidence of LPs, especially institutional investors who are more risk-averse? While everyone has a different risk-profile, everyone agrees that it is a good idea to maximize rewards and minimize risks. Therefore, to demonstrate that their fund has potential, GPs should look to demonstrate the following:
- Structured, best-practices.
- Disciplined, consistent effort.
- Strong track record of successful investing.
- Strong relationships with founders, fellow GPs, and the ecosystem.
- Deep understanding of the market.
Furthermore, GPs must lead the fundraising as opposed to advisors, associates, chiefs of staff, broker-dealers, or an anchor LP. And, the more experienced the GP is, the better. LPs see experienced GPs as lower-risk, generally speaking, than emerging and especially first-time managers. Many broker-dealers won’t work with you unless you have already had your first close, or if you have a tremendous track record.
Therefore, most first-time emerging managers will be raising a seed fund without institutional investment. There are exceptions to the rule. However, you are unlikely to attract an institutional investor during the formative stages of Fund I. So, to start, your initial LP base will consist of mostly family offices and high net-worth individuals.
3: Clarify Your Thesis
The venture space is saturated with emerging funds and venture brands. It has become very difficult for LPs to differentiate one venture fund from another. Without clear differentiation, it will be an uphill battle for GPs to:
- Secure meetings with LPs who can provide the capital for your deployment.
- Attract founders and their companies to invest in and grow.
There are several ways funds differentiate themselves. Typically, this involves a unique combination of one or more of the following (but not limited to):
- Founder Niche: are you empowering female founders, an underserved group, or a group with clearly defined traits? For example, Unshackled Ventures serves visionary immigrant founders, and Neotribe nurtures rebels.
- Industry: Are you focusing on agricultural technology? Fashion technology? Food supply chain? Financial technology, such as with Fin VC?
- Funding Structure: clear protocols regarding what stage of investment and whether you lead rounds or not. For example, Precursor Ventures focuses on providing the very first round of funding for founders, regardless if they are proven or not.
- Operational Structure: Is it a startup studio where fund managers and their teams provide daily, hands-on support, such as with Expa or Human Ventures? Do you offer closed membership and access to specialized knowledge and training that isn’t found publicly?
- Portfolio Support: what is your value-add beyond capital? For example, do you provide deep operational expertise in sales, marketing, go-to-market, and strategic partnerships — a16z is an exemplary fund.
- Track Record: Are you famous for identifying, supporting, and growing unicorns? Do you have a great story behind the founding of your firm? Pejman Nozad @Pear Ventures is a fantastic example of this.
However, don’t seek differentiation for differentiation sake — this comes across as your trying to be something you are not.
A thesis isn’t solid unless it is clear how the GP and the team align with the thesis. The best way to clarify and build your thesis is to audit you (and your team’s):
- Individual strengths.
- Unique interpersonal synergies.
- Experience and expertise.
- Passions and interests.
- Networks and relationship intelligence.
A pattern will reveal itself. I’m a big fan of reverse-engineering a thesis based on the people who are going to be executing upon it. Every emerging manager brings something unique to the table and sees something others do not — reflect, identify, and amplify those points of difference. It is also beneficial for you to engage some trusted advisors to help provide you a 360-degree perspective.
Lastly, your thesis should create a sense of urgency and answer the following questions:
- Why act now and not later?
- What’s the opportunity cost of delaying a commitment to your fund?
For example, Unshackled Ventures leaned in on the fact that amazing founder talent is locked up with visa issues. As such, instead of starting and building new innovative companies, those founders were working in larger organizations to be able to stay in the country. Therefore, Unshackled position themselves to help unleash all that unrealized potential.
4: Build Your Founding Team
Teams statistically outperform solo-GPs. Teams can consist of multiple managing partners, operations managers, VPs, associates, analysts, Entrepreneurs-In-Residence (EIRs), and advisors, for example. A team that is aligned, diverse, and have worked well together before, demonstrates strength and scalability. Again, this all leads to reducing risks and maximizing gains.
However, not all teams are high-performing. For example, numerous funds fall apart because of GP-conflict. Therefore, having long-standing, trusted relationships matter. By long, I don’t mean months, but years. A great example of a founding team built on longstanding trusted relationships is ENIAC Ventures. Their founding GPs have been friends for over 20 years. When you have long-standing relationships with people, you have rich information about them, such as:
- How they behave when things are going well.
- How they behave when things aren’t going well.
- Core strengths.
- Areas they need support.
- How they work in a team environment.
Here are some first-principles for vetting folks you want to build a team with:
- Map out their core values. Behavior provides insight into what is important to someone. For things they value most, they always have the time, money, and resources for. Furthermore, when someone talks about something they value, they are usually more energized. These are all signals that can help you identify who is values aligned.
- Find a project or deal to work on together. One of the best ways to know someone is to work with them on a project. That’s why I am a big fan of first-time emerging managers running SPVs. When running an SPV, you get to understand what’s important to every team member and what value they bring to the table in addition to capital.
- Identify and engage a variety of core strengths. A well-rounded team includes a balance of talents and traits such as; detail and data, people and relationships, visionary and inspirational, planning and sequencing, introverted and extroverted. It is rare for one person to possess all these traits and express them to their fullest potential. That’s why we need a team. For example, one person might enjoy organizing events and interacting with people at scale daily — amplifying the brand through networks and generating inbound deal flow. However, you also need someone who is more analytical and can perform diligence using data — identifying critical risks and reporting on their findings.
5: Commit to a Specific Fund-Size
Be clear on what amount you want to raise and stick to it. LPs do not like it if you change your mind on the fundraise amount because it demonstrates a lack of strategic clarity and experience. So, decide on a fixed number, not a range.
Most first-time emerging managers will be raising a seed fund. Without institutional investment, you are looking at a first-fund-size between 10MM — 25MM (there are exceptions). Samir Kaji does a great job at explaining how to set a good fund target. Your fund size is directly related to:
- The number of investments you intend to make.
- Reserve ratio for follow-on investments.
As a rule of thumb, if you intend to make 25 investments @ check sizes of 500,000 with a reserve ratio of 1:1, then your fund size will be 25MM (25 x 500,000 x 2). This calculation excludes management fees. For a more nuanced calculation that accommodates management fees, you can use Arnaud Bonzom’s helpful tweet:
6: Create Your Content Assets
In another post I created for early-stage founders, The Essentials of Early-Stage Startup Fundraising, I mentioned the importance of creating content assets to help streamline and scale your outreach: 1) A pitch-deck, and 2) An introductory snippet. The same set of content assets applies for GPs as much as it does for founders.
The pitch-deck communicates:
- A clear thesis (focus) that demonstrates market potential and risk.
- A vision beyond the first fund.
- Track record including but not limited to; past exits, current and past investments.
- Current fund status, including realized and unrealized market value.
- Deal flow insights.
- Portfolio construction.
- Proposed fund size.
- Investment criteria and due-diligence process.
- High-level Investment Committee (IC) process.
- Fund terms such as; management fee, incentive allocation, liquidity, committed assets, and capacity.
- Team profile.
- Networks and strategic partnerships.
- A compelling reason to act now, not later.
The first pitch-deck you create isn’t going to be perfect. But as you meet LPs, you can gather feedback and iterate accordingly.
The introductory snippet is a shortened, condensed version of the deck that communicates a combination of the following:
- Credibility and track record.
- Fund thesis and points of differentiation.
- Market opportunity.
- Key team members.
- Why act now?
The above attributes are not prescriptive. They are guidelines. The snippet is designed to help you achieve a few things:
- Generate interest from your immediate 1st-degree network.
- Activate your 2nd-degree network to get introductions to LPs.
- Help LPs quickly decide if it is relevant to them, and whether it is a credible opportunity.
- Secure meetings with LPs so you can present your full deck.
More importantly, because a snippet is so short (100–200 words), the process of creating the snippet will force you to clarify key aspects of your fund to a higher degree. Here is a sample snippet from Unshackled. They do an excellent job of communicating their thesis, establishing credibility, and communicating the opportunity implicitly.
“Unshackled Ventures is the first and only early-stage venture capital fund for immigrant founders. We are actively investing out of our second fund and manage over $25M in assets. Besides investing in immigrants, we sponsor their visas & green cards to enable them to spend 100% of their time building companies. Our fund is backed by some of the most notable investors in the country, including Emerson Collective, Bloomberg Beta and one of the top retail families in the world. Unshackled has been featured in numerous publications and national media outlets, like the Wall Street Journal, Huffington Post, ReCode, Forbes, and Bloomberg.
Some of our more recent investment areas include Autonomous Technology (driverless trucking), Space Technology (Cell tower in space), Climate Change (Methane detection of Oil & Gas), Healthcare Tech (Radar monitoring of senior living), Food innovation (Plant-based protein and modernized food distribution), Future of Work (Coding boot camps), Industry 4.0 (Blockchain, On-demand manufacturing), and Applied AI (Legal, Water treatment, eCommerce, etc.).
Our portfolio companies have raised $60M+ from 330+ co-investors including top investors like Y Combinator, First Round Capital, Sequoia/Accel Scouts, NEA, Khosla, Shasta Ventures, and Village Global (Zuckerberg, Gates, Bezos backed fund).”
Albeit, Unshackled Ventures are onto Fund II. However, the first-principles apply to Fund I too.
7: Tremendous Outreach
Raising your fund takes tremendous outreach, and it is through these outreach efforts that you will:
- Refine your pitch-deck and value-proposition.
- Reveal any holes in your strategy or thesis and amend it accordingly.
- Build relationships within the LP ecosystem.
- Identify who the values-aligned LPs are and regardless of whether they choose to commit funds immediately or not, continue to nurture those relationships.
- Establish your reputation as an emerging manager through quality, consistent touch-points with LPs, introducers, and your GP peers.
These are some benchmarks you can work off as you plan your outreach;
- Outreach to over 500 LPs to secure your first fund. Expect to be frequently traveling to different cities too.
- From a cold start, it can take anywhere between 3–6 months to secure a meeting with a specific LP.
- It takes between 12–18 months to secure your first fund.
- Outreach to LPs should be daily during the fundraising phase. This outreach isn’t limited to just talking to LPs, but also setting follow-ups with them every 1–3 months to build the relationship and keep them updated on your progress.
Though trusted advisors and critical networks can help you bridge the gap faster and reduce friction in the process, there’s no shortcut to building strong relationships. You must leverage the trust you have with your networks (1st and 2nd degree) to make connections, build relationships, communicate value, and secure the right LPs.
Bonus tip: while planning your outreach, consider running Special Purpose Vehicles (SPVs). When you run SPVs, you show LPs that you have access to consistent, quality deal flow. While this is usually more relevant for later-stage funds, I have also seen some Seed funds do this to great effect.
The first fund is the hardest to raise. But once you do raise it, you should raise fund II shortly after, or towards the tail end of your first fund. To gain additional insight into what LPs look for in early-stage funds, I recommend reading resources available at #OpenLP. Elizabeth ‘Beezer’ Clarkson and the Sapphire team have done a tremendous job in putting together helpful content for the venture and startup ecosystem.
8: Enjoy the Process
Just like founding and building a company, raising a fund is a great way to grow as a leader and collaborate with some amazing people. I find the following reminders to be incredibly helpful:
First, the heart of every venture business is people. I think it’s important not to lose sight of this basic fact. It is a huge plus if you enjoy interacting, understanding, and developing relationships with people. Some LPs and founders you meet can become some of your best friends. So, enjoy the natural flow of giving and taking, pay it forward when you can, share insights, and find ways to add value.
Second, raising and growing a fund is a marathon with multiple sprints, and therefore, GP burn-out is a real thing. So, I recommend taking care of your well-being; mental, emotional, and physical. Consider setting aside days to ‘tune-out’ and rejuvenate, even taking your team for off-site retreats.
What I share in this post are guidelines. You (and your team) must exercise your judgment as all advice must be assessed within context, and every context has its nuances. If you find yourself in doubt, I suggest going back to first principles:
- Demonstrate the potential upside to founders, LPs, and key ecosystem players.
- Address key risks and explain how you (team, process, strategy, technology) de-risk those items to key stakeholders.
- Demonstrate your team’s capability to execute on the opportunity.
- Create a compelling reason for stakeholders to act immediately.
- Build relationships and pay-it-forward whenever you can — you never know how it will come back to you.
- Care for your overall well-being — mental, emotional, and physical.
- Enjoy the process!