How to start an Africa focused Venture Capital fund.
Venture capital is different from Private equity and here are the differences and similarities.
2017 has been a very interesting year so far for the venture capital industry in Africa and 2018 will even be better. I expect a few more funds to be announced early next year.
I have been asked by numerous individuals the procedure of starting a fund and i realised that it is best if we distill this process in a single blog post which could be useful to first time fund managers interested in pure play venture capital. If you are looking to raise a P.E Fund please click here
As a general rule of thumb, as a General Partner you are expected to put in 1% 0r 2% of the amount that you are seeking to raise. This can be spread over 5–7 years depending on who the limited partners are but if it is fellow entrepreneurs or small family offices this sum can be waived.
According to my experience, it is best to start off making angel investment deals before graduating into full time fund management because it is a different ball game. Here are some of the lessons i learned angel investing.
The industry works on a 2–20 model ie “ 2% of the fees per year and you get compensated 20% or 30 % of carry. ie the money you make at exit of every deal .
Key decisions for first time fund managers :
- Time commitment : a typical fund is a 10 year commitment, if you don’t enjoy this process don’t waste your time or anybody else’s time for that matter. Even though everyone wants to start a fund, it is not for everyone and just like startups the failure rate is pretty high, the vast majority of first time managers don’t raise second or third funds.
- Deal sizes : As a fund you have to decide which segment of the market best suits your skill set and style of operation. It can be seed,seriesA or if you have a larger fund B or C.
- Thesis of the fund : in this business you get paid for your results ,having a unique thesis is what sets your fund apart from the rest so the 2% management fees is purely survival money to pay rent, office, travel and perhaps cover your phone bills in order to execute your thesis. The rest is a pure hustle.
- Location: Most Africa focused funds are registered in either Mauritius or Luxembourg but that depends on where your investors are. Some are also domiciled in the US.
- Not a get rich quick scheme : Let’s assume you raise a $2.5M to do $75K-120k deals and you are lucky to return 3x of your fund ie $7.5M. That works out to be $2.5M * 20% + $2.5M * 30% = $1.25M. Let’s assume you have 2 people that’s $620k, and divided by 10 years, that’s $62k/year. Some jobs can pay you more than THIS just being an executive. In venture you don’t get paid for 10 years.
- Return capital: this is the most important decisions of all because it allows you to stay in the game.
- The power of trusted networks: it literally takes a village of other trusted associates and VCs to raise a fund. I have previously written about this need for us to create trusted networks.
Structure of a VC Firm.
The other hack is to find someone who has done this before and partner with them, this solves two issues :
A)Credibility : startups don’t want to work with rookie investors unless they are really desperate.
B)Fundraising: the lifeblood of a fund is constant fundraising and this is usually determined by your portfolio as well as your past experience of generating outsized returns.
If these numbers don’t spook you out then go ahead and i wish you all the best.
It is always great to learn from some of the most mature markets so here is a list of most micro funds that are active in the US,UK and India.
Pitch deck for a VC Fund.
VCs never ever share their decks but the team at Seedcamp have just released their recent deck, it contains valuable information and gives a clear template on how to structure your fund.
Here is the full deck :
Fund management solutions providers
There is a big industry around the venture capital and Private equity sector made up of solution providers such as MJHudson , TridentTrust or InnPact who are very useful,please do reach out if you have any specific questions.
For those interested in impact investing fund management, i would encourage you to look into Capria https://capria.vc/ it’s like YC for impact VCs.
Key resources :1) AVCA : Africa Venture Capital Association.
2)Toolkit for Fund Managers from CDC : http://toolkit.cdcgroup.com/
