2021: What it takes to raise a fund — from the people who actually did
In an industry so elusive that it’s said you have a better chance of getting into the NBA, it’s few and far between that you get the chance to hear about where it all starts: raising a fund. As you’d expect, it’s easy to get lost in the banal minutiae of the game; often asking yourself whether you’re being ghosted or simply equipping a set of thinly veiled paranoia. To learn about the intricacies and strategies of the fund-raising process, we set up a call with some of these mysterious venture capitalists: Kelli Jones, co-founder of Black Hatch Fund; Jonathan Ellis, founder of Sandalphon Capital; and Victor Gutwein, founder of M25. Here are their top 8 pieces of advice in no particular order:
1. Set an achievable fund target
Although venture capital is mysterious and esoteric in a multitude of ways, there’s at least one rule that applies to everyone, everywhere, in every job: set a realistic goal. In the context of venture, this means setting an achievable fund target. Although this tip is as basic as it gets, it’s also as important as it is simple. Coming out of the gate with a target of $100+ million may not get you laughed out of the door if you're Neil Shen or Lee Fixel, but it certainly will for the rest of us plebs.
2. Don’t lower your minimums
Your initial reaction to achieve your fund target may be to lower your minimums. However, using your second system of thought — as described by Kahneman —you would find something entirely unintuitive: lowering your minimums is bizarrely counterproductive to your goal. By reducing your minimums, you’re generating more work for yourself that takes away from essential outreach. Additionally, lowering your minimums kills the FOMO by signaling your struggle to raise capital to prospective investors.
3. Lock in an anchor before you leave your current investment role
Although it’s enjoyable to blissfully dream about being successful on day one, it’s important to be cautiously realistic. Locking in an anchor before you leave your job is a good way of hedging your bets in case worse comes to worst. But don’t get it twisted. As Ellis pointed out, an anchor is less about the money and more about the validation.
4. Hustle is not a strategy
One thing that Gutwein astutely harped on was that hustle is not a strategy; doesn’t everyone think they have hustle? Convincing sophisticated investors to give you large swaths of capital involves significantly more than just grit and perseverance. A concise, well thought out plan with potential investments lined up withstands scrutiny considerably more than hustle.
5. You know venture… until you don’t
Ego is something that has plagued titans in the finance industry since time immemorial. When you’re raising a fund, you’re especially humbled. Raising a fund is inevitably nothing of what you’re used to and everything of what you’re not. Writing an investment memo without historical performance is more about marketing than it is about finance. As Jones stated, it’s a different process working from the inside. In short, drop the ego.
6. Don’t go it alone
As it is with all niche communities, the venture community is very connected with one another. Consequently, the majority of its constituents are amicable to helping a fellow member in their spare time. Why not take the free access to their network and expertise?
7. Deal economics
More often than not, getting an anchor is a ruthless, painstaking endeavor. That being said, there are a couple ways to cope with this through favorable deal economics. Some strategies employed by the venture capitalists on the call were the following: (1) lower management fees (2) higher hurdle rates (3) a sneak peek at prospective investments (4) future deal preference and (5) sidecar preferences.
8. Endowments always want you to be bigger
Getting a diverse set of LPs is not only preferable when it comes to networking for future funds, but it also helps to propel your portfolio companies through to their next fund cycle. That being true, some LPs are harder to get on the line than others; endowments being the most infamous. Even endowments that purport to be in your vertical will tease you in order to keep a foot in a door if you make it big. To them, bigger is better and a quick turnaround spans an entire year. In this case, offering preferable economics with each subsequent fund investment may be the route to take.