The unvarnished truth about venture capital — fund edition (2/6).

🔍Dive deeper into the VC world, where dreams and reality collide. Today, we’re uncovering the gritty truths behind running a VC fund. Let’s get real!

In this sequel to the recently published LP-focused piece, we’re exploring the less talked-about sides of managing a VC fund. Expect numbers, stories, and maybe some straight-up advice. 📊

🧐 Inside the VC Fund: Managing a VC fund is no walk in the park. We’re talking about the hard stuff: finding good deals, doing your homework on startups, figuring out when to sell, and how to tell if you’re actually doing a good job.

Strategy:

1. Longevity: Success in investing is a marathon, not a sprint. Even the best strategies can falter unexpectedly, making endurance and adaptability key to long-term prestige. 🏃‍♂️
2. Narrative-Driven: Seed and pre-seed stages thrive on compelling stories. Aligning with the current narrative (AI, web3, creator economy, fintech) can ease fundraising, though history shows many burn through capital chasing trends. 📉
3. Insider: At its heart, VC operates on privileged information. Without access to insider insights, relying solely on public data offers no competitive advantage in the investment landscape. 🕵️‍♂️

Operations:

1. Remote Role Paradox: Everyone desires a remote role in investing, yet those in hiring positions often prefer the traditional office setup. 🏠
2. Outdated VC Tech: Despite being in the forefront of funding innovation, many VC funds rely on basic tools like spreadsheets and emails, making a “tech-driven” label surprisingly easy to earn. 🛠️
3. Need for Innovation Hubs: Success in VC often requires immersion in innovation hotspots. The crucial insights and networks are rarely found far from these ecosystems. 🌆
4. Seed Fund Caution: “Spray-and-pray” approaches can backfire, especially for startups needing substantial follow-on capital, potentially deterring future investors. 🚿

Dealflow/Sourcing:

1. Deal Flow Reality: The notion of exclusive deal flow is largely a myth. Building genuine relationships yields better opportunities than transactional exchanges. 🤝
2. Personal Connections: The strongest deals often stem from deep, personal connections. Viewing interactions purely as deal exchanges won’t attract top opportunities. ❤️
3. Software Limitations: Relying solely on sourcing tools like Pitchbook places you in direct competition for deals with everyone else; it’s not a silver bullet. 🎯
4. Inbound Insight: While most unsolicited deal flows can be disregarded, an exceptional and creative outreach deserves attention. ✨
5. Deal Flow Quality: Achieving a consistent and thorough view of potential investments requires a system that offers quality assurance without mandated diligence, focusing on comprehensive exposure and evaluation. 🚫

Branding:

1. Branding Dynamics: In VC, reputation is everything. Build it by establishing a solid track record or being vocal online, but remember, LPs typically value performance over noise. 🏅
2. Content Strategy: Constant content creation isn’t mandatory. While it boosts discoverability for a few, success stories like Benchmark prove that a minimalist approach can also thrive. Crafting or discovering marketing channels for portfolio companies is mostly invaluable. 📚
3. Brand Attraction: Top startups seek prestigious VC partners. Without top-tier status, extra effort or closer founder relationships become crucial for securing meetings. 🔍
4. Brand Anxiety: Many VCs fear obscurity in an era valuing strong personal and institutional brands. Without a high-profile network or massive online following, some wonder about their impact in the VC landscape. 😟
5. Twitter Presence: Building a Twitter following now might not be worth the effort. With the platform saturated, creating impactful, original content consistently is a daunting challenge. 🌐

Positioning:

1. Essential Skill: Mastering positioning is crucial in VC, attracting top opportunities directly to you, making it a game-changer in sustaining success. ✨
2. Specialization Wins: Sector experts often outshine generalist funds, as rapid changes make deep knowledge in specific areas more valuable than broad expertise. 🙏
3. Contrarian Scarcity: True contrarians are rare in VC, with many hesitant to voice genuine opinions, fearing backlash or dissent.
4. Value Add Dilemma: The uncertainty about what value-add services to offer (recruiting, marketing, data science) and their real impact reflects a broader existential question within VC firms. ❓
5. Product Homogeneity: Despite talk of value addition, the primary offering of VCs is capital. Entrepreneurs seek investment, not just boardroom presence. 📣
6. Scale Challenges for Small Firms: While small VC firms can navigate around some industry challenges, their limited capacity to provide substantial funding remains a significant drawback. 🤔

Decision-making:

1. Seed Investment Focus: Prioritizing financial forecasts or fund returns for seed investments misses the point. The focus should be on the company’s potential, not just the numbers. 🌱
2. Investor Priorities: Genuine investors back promising companies without relying on fabricated metrics or extensive checklists to validate their choices. 📊
3. Political Dynamics in VC: In some venture firms, internal clout is gained through deal-making, creating a culture fixated on capital deployment rather than strategic investment. 👀
4. Deal-Making Politics: Trading support for deals within firms can cultivate a culture of mediocrity, contributing to subpar returns in an industry where excellence is critical. 👔
5. Geographic Challenges: VC firms with multiple offices face unique hurdles in decision-making, with partners in satellite locations feeling detached from the core team. 👥

Returns:

1. Ego vs. Returns: Ego can both propel and devastate fund performance. Cashing out with a 4–5x return on a secondary market often outweighs the risks of holding for an IPO, especially when unforeseen developments can erase gains entirely. 🚀
2. Fundraising Anxiety: The pressure to perform for future fundraising is intense. Achieving a 2.5x return might suffice, though a proven track record may lower this threshold to 2x. Without strong results, aiming for 3x becomes necessary, a goal many VCs struggle to reach, leading to constant worry about securing the next fund. 💰

In this second installment, we’ve peeled back another layer of the venture capital world, revealing the complexities of fund management. From the strategic plays and operational quirks to the nuances of deal sourcing and brand building, it’s clear that running a VC fund is a multifaceted challenge. Stay tuned for more insights as we continue to dive deeper into the untold stories of venture capital, with upcoming editions focusing on:

• People edition (3/6). 👥
• Junior role edition (4/6). 🌱
• Partner edition (5/6). 👔
• Startup edition (6/6). 🚀

Disclaimer: The opinions expressed in this article belong solely to the author and may not represent the official stance of any entity associated with the author. This content is intended for informational purposes only and should not be construed as investment advice or a solicitation for the purchase or sale of any financial instrument. Readers are encouraged to conduct their own research and seek professional advice before engaging in any investment activities.