So You Want To Raise a Venture Capital Fund…
The number of early stage VC funds has radically increased over the last 3–5 years. According to Crunchbase, 295 venture funds of $100M or less were raised in 2018. So you might be thinking to yourself, as we once did, “It must be pretty easy to pull together 10, 20, 50 or 100 million dollars.” Spoiler alert: It is not. After many years of investing in early stage technology deals as angels and through leading our own angel syndicate, Craig Cummings, my business partner and fellow West Point graduate, and I set out to raise our first committed venture capital fund in Q1 of 2017.
Background
Before raising our first fund, Craig and I had been early stage technology entrepreneurs after leaving the military. Collectively, we had operated 14 companies and had many successes and a few failures (aka “learning experiences”) along the way. In addition to founder-operating roles at early stage companies, we had also been actively investing as individual angels and as the lead for our Moonshots Capital angel syndicate. At the time we went out to raise Fund 1, our investor track record and portfolio looked something like this:
Angel investing, 2004–2017:
- $2M invested into 37 companies. Check size: $25K-$100K. 10 exits. 4.5X CoC. 130% IRR. 6.0 Net TVPI.
- Portfolio companies included: LinkedIn, Pandora, TrueCar, Active Network, Bitium, Ustream, RideScout.
Angel syndicate lead investing (Moonshots Capital Syndicate), 2014–2017:
- $10.4M invested into 27 companies. Check size: $250K-$500K. 4 exits by the time we were raising. 0.9 Net TVPI.
- Portfolio companies included: Slack, Fair, Olive, ProducePay, ID.me, Metaverse.
In addition to our demonstrated access to great deals and (what some might say remarkable) investment performance, Craig and I had been investor partners for six years and had established a team of investment professionals (legal counsel, CFO, controller, and trained associates), investment processes (CRM, communications protocols, etc.), and had proven we knew how to operate an investment business.
Strategy
Every fund needs a thesis so that LPs can figure out how to apply their investment in that fund to their own portfolio criteria. We believed ours was both authentic and differentiated — plus we’d already been executing on it successfully for years.
Great leaders are hard to come by. We believe the best ones are military trained or trial-by-fire entrepreneurs who have the ability to motivate others to action, inspire trust, and plan heuristically. We invest with conviction when those attributes are present. Fundamentally, we focus on investing in extraordinary leadership.
Simply put, it is the only thing that matters at the early stages, because no young company ever ends up being exactly what it sets out to be. In the start-up journey, it is the best leaders who can navigate the ambiguity, change in direction, and motivation required given only limited resources. So that’s what we look for.
We combined our focus on extraordinary leadership with our access to great deals in both of our long-standing home cities that are blistering hot for tech investments (me in Los Angeles and Craig in Austin) as well as our extended networks via West Point and the military, the Henry Crown Fellowship, the 75 (now over 80) founders we’d previously funded, and our personal networks of investors and institutions. We felt we could make a compelling argument for asking for capital from any LP that wanted access to great deals by strong fund managers.
The Raise
So, with all of those factors in play, it was time to get to work… actually raising the money…this is what GPs tongue-in-cheek refer to as the “fun” in fundraising. To set a little context for what might be a “hard task,” Craig and I had both been through what many people might consider to be rigorous activities that were “fraught with peril” — graduating West Point, earning a Bronze Star in Afghanistan, completing Airborne and Ranger Training, earning a PhD, a JD and an MBA — even winning The Apprentice and surviving a year working with Donald Trump (without being fired!). Really, how hard could it be to raise a committed VC fund? The answer, in a word — HARD.
We were able to close on the first half of the fund ($10M) after six months of fundraising and started deploying that capital. It took us another 12 months to close on the second half. 18 grueling, soul-searching months of being told “please come back to us with more,” “we’re over-committed in early stage right now,” “you’re too small/big for our check size,” to flat out “no” — which, by the way, is much easier to manage than the insincere string-alongs.
Although it was incredibly difficult, the work has been worth it. The main difference between how we were operating as angels and through our syndicate versus how we operate as a fund, is that we now are able to lead rounds — with conviction.
Current Fund 1 Status
We’re excited to say that we’ve invested in nine phenomenal companies to date. We’ve committed (meaning invested our first check into a company and kept an additional amount on reserve) a majority of our capital from Fund 1 and plan to start the FUNdraising process again soon.
Our Fund 1 breaks down as follows:
- 10 companies: Moonshots led in 7 of the deals
- Founder make-up: 3 military veterans, 3 females, 4 ethnically diverse
- Partner co-investors: GGV Capital, Lux Capital, BuildGroup, Techstars LA, Swan & Legend Venture Partners, Luma Ventures, Bonfire Ventures, Mucker Capital, Wavemaker Partners, Halogen Ventures, Capital Factory, ATX Venture Partners, BNSG Capital, Spitfire Ventures
- Locations: 5 in Southern California, 4 in Austin, 1 in Philadelphia
- Sectors: SaaS, Cyber Security, Travel, Mobility, Augmented Reality, Big Data, Advertising Tech, Smart Wearables
Key Takeaways
The FUNdraising process, while difficult, comes with the territory of being a VC, but I’d warn that it is not as easy as TechCrunch’s daily announcement of a new fund would have you believe. A few takeaways below for the first-time GP about to set out on the task of raising a fund:
- Double the amount of time you are planning to fundraise and be prepared to operate with a smaller amount than you originally target.
- Start investing as quickly as you can in the process so that you can show LPs exactly what they are getting for their money. (Of course, make sure they are very good deals!)
- Track your activities and progress meticulously. This is 100% sales.
- Maintain communications with every single potential LP that seems genuinely interested.
- Put the entrepreneurs first…they are really what this business is all about.
- Finally, in good military fashion, always have a Plan B in place.
