How to Raise a VC Fund [Investor & Expert Insights]

This article is for those who are preparing, or have begun, to raise their first venture capital (VC) fund.

We have recently co-sponsored an online panel discussion on this topic with top VC fund founders and managing partners, which was led by Ian Foley, a Partner and founder of Level Ventures.

We’re now sharing the most relevant Q & A provided by the event panelists in this article.

Inside, you will learn how to:

  • Optimize your investment track record

  • Develop relationships with potential fund investors

  • Best present startup deal flow, and more

How to Raise a VC Fund [Investor & Expert Insights]

Table of Contents

Venture capital fund event panel speakers

The panel included two first-time VC fund founders, Vincent Diallo, Managing Partner and co-founder of Interlace Ventures and Shruti Gandhi, General Partner and solo founder of Array VC.

Providing the perspective of Limited Partners (LP’s), those who invest capital into VC funds, were Thorsten Claus, a Partner from Northgate Capital and Evan Jaysane-Darr, Partner with Invesco Private Capital.

1. Your track record as an investor

What is the best way to build a track record? Is it to invest into startups using your own money? Is it to join a fund in a junior role?

According to the panelists, the answer is both. If you can take the risk to invest then try that, but joining other funds is a good way to train yourself.

Besides track record, what do you think are the 3 key aspects/factors LPs (limited partners) look for when deciding whether to invest in a first-time emerging manager?

Track record is very important. Team is of course important too, especially if it ties in naturally with the fund strategy, such as seed track record and seed investment strategy for a new fund. Most first time emerging managers will have less extensive track records. Having a clear schedule of investments as a new GP is helpful so LPs can quickly assess what you’ve invested in and how you’ve performed (and also understand what you’re adding to their portfolio).

Bottom line:

Make it easy for the LP.

How important are early returns when evaluating emerging (fund) managers?

Early returns (actual distributions) can be helpful to show how you are pruning the portfolio, helping to exit companies that are unlikely to raise further capital, or scale to the harsh growth requirements of most venture capital investors. Early paper gains are not that important and are indeed a red flag to LPs when managers take the last valuation as a gain. More interesting is the person at a firm that leads follow-on investments, not their valuation.

People make investments, not ‘partnerships’, and not every partner in a partnership is driving returns.

If institutional investors are less inclined to bet on first-time managers given risk, reputational damage, etc., who might be more inclined (than institutional investors) to bet on those first-time managers?

High Net-worth Individuals and Family Offices.

2. Building relationships with LPs

For those of us who are currently working at an institutional venture firm and plan to spin out in the future (let’s say 12-18 months), how do/can we start to build relationships with LPs? Is it appropriate to do so? Or should we wait until we leave our current fund?

Explore ways to have your current fund manager or LPs invest in you. That will really help jump start the process.

It was mentioned to start building relationships with LPs before you start raising. How do you recommend we position the conversation/meeting? Is it as simple as saying something like “I am not raising for my fund yet, but I want to raise in the future and I want to start building the relationship now.” Or is that too forward? Should we be more creative, such as the classic “I wanted to pick your brain about XYZ topic…”

Attend events where there will be LPs and the context is already set for a conversation between GPs and LPs.

In terms of building the relationship with LPs, what are some creative ways you can win favor and help the LP to create value for them?

Determine which LPs you want to work with and what is important to them, especially from the business perspective. If you provide business value, that could ingratiate yourself with the LPs

3. Sharing deal flow with LP prospects

For LPs that are interested but not committed, I’ve found it helpful to talk about individual deals that the would-be fund would like to do as a means of building trust. But I don’t know how much I should share. Is it advisable to share an investment memo with a prospective LP (especially since that’s rather proprietary)? Is sharing deal flow even that important or is it more about selling a vision and past track record?

On-target deal flow is very important, even more important is the reasoning why you think this is a good idea for your firm and fund (not as an individual investment). Consider sharing an example that looked like an ideal candidate for the fund, but then turned out not to be for a *non-obvious* reason. But deal flow is only interesting if you’re also executing deals, because ‘what-ifs’ are not helpful. Who knows if you actually would have been able to execute, get into the round, actually wire the money, etc.?

Do you see emerging managers showing you the investment memos for individual deals? Or just a slide deck? Are memos just too much detail? I’m trying to get 2 LPs to commit once they’ve verbalized interest, and we are struggling with the next steps for how to get from date 4 or 5 to married.

I suppose it’s really a question about tactics and best practice for closing.

Regarding closing LPs, how are you addressing their questions: “why you, why now?”? To get them over the finish line and close the funding, you may consider appealing to their asset allocation strategy, their ego, your scarcity in access, or fund terms (discounts, etc.)

4. Miscellaneous

Having been on both sides of the table, what’s more difficult? Founder raising venture capital or VC raising funds? Would you switch given a chance? Why/why not?

It’s actually easier to raise for a startup company, granted it’s a good idea with a good team (all things being equal). Fundraising for a fund is difficult and undifferentiated.

Is the fund theme as important as investment focus on LP Decision making? Diversity, Inclusion, Sustainability, etc.?

This depends on the LP. Investment thesis can be more important than the theme, especially the more articulated it is — showing you’ve been thoughtful about building your fund strategy over successes over time. Diversity, inclusion and sustainability are very important in this market environment, which is a good thing, and some LPs even have mandates to invest in funds including these aspects in their investment criteria.

If we’re raising a certain amount of LP capital, should we announce we’re raising a percentage of that figure, say 70%, to appear oversubscribed?

The answer depends on how much visibility you have into your LP pipeline. Most LPs, especially institutions, will know who is actually oversubscribed. In terms of priority when building a firm, this may not be as highly valued as track record and executing on fund strategy.

How critical are the advisors you select, if at all, for your fund? Are there any best practices that we can/should consider while doing so?

Depends on what the advisors are doing and their caliber. Advisors are not always helpful.

How much more difficult is it to raise as a solo GP vs. having one or multiple partners?

It’s harder for institutional investors and easier for high net worth individuals. The problem is always (a) institutionalization; (b) platform growth — but if you plan to stay at the same size and your investor likes that size, then it’s a good match. Hiring a second partner later always is a risk, and doing it well is hard. Generational change is always hard.

Survey of event attendees

Of the 350+ event registrants, 181 completed a brief pre-event survey of their VC fund experience and interests.

81% of those surveyed stated that they would like to raise a VC fund, but they have not started pitching yet (to LP prospects). 16% percent said they were actively closing their first VC fund.

There was considerable diversity in the areas of investment focus, as shown in the figure below, with nearly one-third indicating a Generalist investment focus and 21% planning to focus on Enterprise (B2B).

Figure 1. VC fund investment focus areas

Survey responses: anticipated VC fund size

In terms of anticipated fund size, 44% of survey responses expected a fund size of between $5M and $20M US dollars. Eighteen percent expected to raise a VC fund of up to $5M. Another 18% expected to raise a VC fund of more than $40M. Twenty-one percent of respondents expected to raise a fund of between $20M and $40M US dollars.

Survey responses: sources of LP capital

Nearly 70% expected to raise the majority of the LP capital for their funds from family offices and high net worth individuals, while only 15% expected to raise the bulk of their capital from institutional investors and another 12% expected to raise their capital from corporates.

Survey responses: biggest challenge in raising VC fund

In terms of challenges expected in trying to raise their VC funds, 44% felt that securing a lead LP was the biggest challenge, while 39% indicated that identifying the right LPs for their fund was to top challenge. Creating a differentiable fund value proposition was felt to be the biggest challenge by 16% of respondents.

Written by Sandra J. Miller, CEO at Runway Innovation Hub

About Runway Innovation Hub

Runway is a Silicon Valley-based innovation company that provides strategic consulting, all-inclusive workspace and virtual office memberships to a global community of global enterprises and tech startups.

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About Level Ventures

Level Ventures helps ‘level the playing field’ for ambitious investment professionals. Their network of investment professionals are in the early/mid-stage of their career. The professionals work at Top 100 venture and private equity firms at the Senior Associate, Principal, or Junior Partner level. We provide our network with career advice and support, as well as offering them the ability to leverage our capital.

Interested to strengthen your investment track record and/or to start your own VC fund? Contact Level Ventures ([email protected]).