10 THINGS I THINK ABOUT LOOKING AT EMERGING VC FUNDS.
The Challenges of Raising a VC Fund
Hard questions you will need to answer at some point
Emerging fund manager are a very unique breed facing an extraordinary set of challenges.
The real problem about launching a venture capital fund as an emerging fund manager is that they will have to sell a product to sophisticated and experienced LPs — it’s an unbalanced battle without any room for mistakes. Once they get going they will explore the hard questions of venture capital and they are expected to have spot on answers.
I summarized #10 things to think about.
1. DISTINCTIVE FUND STRATEGY //
There are three common strategies in venture capital, which you can touch base on. Don’t copy them one to one, customize them for you needs and add your secret sauce. Which is the right #DistrinctiveFundStrategy for you?
i. The value adding VC (move existing investments up the curve)
ii. The network-based sourcing VC (rescale the distribution)
iii. The drive alpha, reduce beta VC (pick further up the curve)
2. THE TRACK RECORD TRANSFER //
Just because you have been lucky or successful (or both) in the past, doesn’t mean you can replicate your success into the future at scale. If you are selling your track record as a value proposition, make sure it is in line with your fund thesis and the strategy selling to LPs. Furthermore, there is a major difference in deploying 25k checks with your own money, over 500k checks with LP money.
3. NOT ALL TEAMS ARE TEAMS //
Complete teams with a complementary skillset and a working history can call themselves a team. Just knowing each other has no value, exactly zero to be accurate. The team you will bring to the game will not only be your partner(s) in crime, they will be your second wife or husband for the next decade, a divorce is no option per se and you will have to master all ups and downs together. Bring an A-team or stay at home.
4. ALL SUPERHEROS NEED WINGMEN //
The second team is the backbone of success — your senior advisor, your venture partner, your deal- and research team and the whole back office. You don’t have to have them on day one, but you must have a plan on how to bring them on board and retain them — “A” people hire “A+” people “B” people hire “C” people. Your wingmen will cover all whit spots and leverage your strength. If you want to go fast go alone, if you want to go far go together and choose your crowd wisely.
5. SOURCING WIZARD OR SOURCING SWINDLER //
A sourcing wizard has a unique proprietary dealflow and a proven ability to win deals in competitive markets, which is crucial especially if you don’t have a bold and recognized brand at day one. Your ability to win deals will depend on the value of what you offer, aside of money — strengthen your platform play and sharpen your intangible edge. Sourcing swindler claim to access deals via their close network of angels, founders high calibre network backed by a bullshit bingo slide and loads of name dropping.
6. THE CONSTRUCTION-THESIS MISCONCEPTION //
Is your portfolio construction in-line with your fund thesis? Do you actually have sufficient bandwidth to support your thesis, once you are fully operational? Your deployment strategy has to make sense on all layers from entry investments to follow-ons, matching deal velocity and draw-down capacities, your balanced risk-return profile and so on. If there is an unbridgeable gab between construction and thesis you will be going down.
7. DIVESTMENT AND THE INVISIBLE HAND //
Most emerging fund manager are neglecting a pro-active divestment strategy. You may argue that portfolio companies don’t get sold, but they are bought instead. Well, yes and no — though what you don’t want is to distribute shares instead of cash at the end of a lifecycle. Therefore, it does make sense to actively seek to sell portfolio companies with a clear strategy post-investment phase.
8. THE MAGIC OF STORY-TELLING //
Fundraising is about story-telling, see Netflix’s’ “Inventing Anna“ this will tell you a lot about the psychology of fundraising (ignore the lying part). If you have nothing at hand, aside of a team and a vision, you better be a damn good story-teller, that’s what people remember. Emerging managers often struggle with building a compelling narrative that makes LPs want to dig into the matter. You have exactly one job in your first meeting, which is to get a second meeting — not more and not less.
9. FUNDRAISING MOMENTUM AND VELOCITY //
Adeo Ressi nailed it “Fundraising is the single most misunderstood thing in VC“ momentum and a well planned fundraising strategy is everything. In order to succeed and create momentum, you will need patience, persistence, persuasiveness and you will have to be pragmatic. Think about 1st closing LP perks and a tailored fundraising strategy for different targets and closings. Relentless networking is the key to success in fundraising.
10. MASTERING THE GAP //
To be fair, the real trend is that the biggest chunk of influence is coming from the power of the individual general partner(s), rather than the VC brand itself. There is a massive amount of super talented people, who may not be the greatest VC for every startup, but for a specific group they might be the perfect match — find that specific group.
Any thoughts or questions? Reach out!
I am a passionate and hands-on venture capitalist, serial entrepreneur, emerging fund advisor and active angel investor via @MinimalVC. After 10 years of flying over 1.000.000 miles, spending 1.200 hours on airplanes, looking at +1.000 start-up pitches on all continents, I decided to gather some of my thoughts based on this extremely rewarding professional journey. Reach out and get connected!