Nov 10, 2022
Venture Capital

Thinking About Starting Your Own Fund? Here’s 5 Things You Need to Know

Gautam Kumar

or a first time fund manager, raising a fund can be a daunting task. Historically, launching a first-time fund has been an epic endeavor. The fundraising journey can easily stretch from twelve to sixteen months. On top of this, bigger checks tend to be written to vintage funds, while a lot of first-time funds and spin-off managers can experience years of famine. However, despite these challenges, raising a fund is far from impossible.

In this post we will shed light on some of the important aspects from the limited partner perspective and go through five essential things you need to cover to set yourself up for success when raising your first VC fund.

1. Define Your Investment Thesis

The first step before you start constructing your portfolio model is to define your investment thesis. Your thesis outlines the sector, stage, geography and the check sizes you will be investing in companies. When raising a fund, you must be able to articulate your thesis and demonstrate your expertise to your investors.

For example - We are a Pre-Seed to Pre-Series A VC fund investing in SaaS B2B companies across US and Canada with ticket sizes in the range $200,000-$600,000. In the above example, you have clearly defined the stage, sector, geography and range. 

2. Assemble Your Team

If you want to start out as a first time solo fund manager then you are going to face a plethora of challenges. That being said, there are plenty of GPs who successfully raised a fund their first try. A great example of a solo GP raising his first time fund is Mac Conwell, GP of RareBreed Ventures

Throughout his fundraising journey, Mac has exhibited grit and persistence, one of the key qualities necessary to be successful in the VC fundraising journey. Mac employed a thought leader marketing approach to create a unique brand for RareBreed Ventures and continually participated in multiple panels and spoke at webinars organized by accelerators and incubators. Thus, he added value to the startup ecosystem by sharing his knowledge and increased visibility for RareBreed Ventures. 

Just like the management team of an early stage startup needs to have founders with complementary skill-sets, a first time fund should have Partners with complementary skill sets. 

A great VC founding team should have the three core ingredients- sourcing, evaluation and value addition. Let’s break down these three core ingredients from a limited partner’s perspective who is investing in an early stage fund. 

Limited partners are looking to invest in funds that have a unique advantage to source the ‘homerun’ companies in their target industry. In a nutshell, limited partners want to see how an emerging fund manager can sort through the chaos that comes from early stage companies and source companies with a high degree of potential.  

Let’s say there is a fund manager who has a unique advantage to source companies in his target industry. The next facet a potential limited partner will evaluate is how the fund manager evaluates or performs due diligence on relevant companies for investment. Limited partners want to see whether the fund managers have developed a set of pointers or a system to identify early signs of growth in their target companies.

The third aspect associated with fund manager evaluation is the value addition or the smart capital fund managers bring to the table. Early stage investors can often play a major role in defining the growth trajectory of a company. Hence, limited partners want to ascertain the secret sauce the fund managers have in terms of their prior operational experience or network to facilitate the growth of their portfolio companies. 

3. Outline Your Sourcing Strategy

After defining your investment thesis and assembling your team, it’s vital to create a sourcing strategy. Just like finance is the lifeblood of any organization, sourcing is the lifeblood of any VC fund. Your sourcing strategy is one of the most important elements LPs consider while evaluating VC funds for investment. Most of the time, LPs are looking to bet on GPs who have access to ‘proprietary’ deal flow and can outperform other funds. 

So how can you create a proprietary sourcing strategy? Below are just some of the ways to do so:

  • You or your partners have been an active angel investor in your target stage and geography and you have built a network among founders and a reputation to source deals.
  • You or your partners have worked as a service provider or consultant to startups in your target stage, geography and sector. You will leverage your sourcing strategy as a service provider/consultant to source companies for your fund. 
  • You or your partners have been a mentor in many accelerators and incubators and have built a network to source companies. 
  • You or your partners have been working for a VC fund already and have built a strong presence on social media and your community. 
  • You or your partners have worked as an Investment Adviser helping startups fundraise by making introductions to VCs.

4. Highlight Your Track Record

Some LPs define emerging managers as a GP who has raised two or three funds while others define emerging managers as a GP who is just raising his/her first fund. Track record plays a major part in the decision making process of LPs. Simply put, LPs are trying to minimize their risk and GPs who have a record of investing in well performing companies present a safer bet. 

Usually, LPs are looking for minimum 3x net return from a VC fund over a period of ten years. This means that, on a gross basis, the fund has to return more than 3x accounting for the expenses. You can show your track record in the following ways: 

  • If you have previous experience as an angel investor then you can highlight your angel investment portfolio and the growth.
  • If you have already worked in a VC fund then you can highlight the deals you sourced and the performance of those deals.
  • If you have been consulting with startups for sweat equity then emphasize the growth achieved by the startups as it relates to your contribution as an operator.

5. Develop Your Fundraising Strategy

If you are raising your first fund then it is highly imperative that you target the right LPs for your fund size. Usually, first time fund managers raise a substantially smaller fund and build a track record before going on to raise a larger fund. Hence, if you are raising a $10 Million to $20 Million fund, then you cannot expect to target large pension funds or endowments. You will face fierce competition from existing fund managers. 

You and your partners need to leverage your existing network of founders, family offices you have connections to, or friends who would be willing to be the first backers for your fund. In addition, there are fund placement agents that help with fundraising and charge a success fee for making introductions.

To sum up, you need to have a strategy for the next twelve to sixteen months to raise a fund where you first start with creating an investment thesis that will be reinforced by your network and experience to inspire confidence in potential limited partners to invest in your fund. 

We hope you enjoyed this primer on raising a fund. In the upcoming blogs we will be diving deeper into portfolio construction approaches!

This post was written by Gautam Kumar (Senior Investment Manager at SeedBlink) 

If you are curious to learn more about how to think about a follow-on strategy for your fund? Then check out this insightful blog about follow on strategy from Mike Palank (MAC Venture Capital) and Anubhav Srivastava (Tatyc)  

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