By Adeo Ressi
Last year, only 87 new VC funds were closed in the United States — about half the number seen two years ago. Aspiring investors are often put off by the time and cost commitment of launching a VC firm, as well as the grind needed to secure the coveted first close.
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With more than two decades’ experience in the sphere, I’ve helped thousands of aspiring investors reach that first milestone and go on to build extremely successful funds.
These are my three key tips to get going:
Bake your ‘secret sauce’ into your investment thesis
Your investment thesis is a combination of your firm’s values and the roadmap for how you’ll make LPs money. In it, you need to say what’s important to you, what you want to achieve as an investor, and how your fund will make those things happen.
But you also need to state why you’re the right person. What are your unique differentiators? Maybe you already have an established brand, strategic contacts, niche experience or a proven track record as a mentor.
Share the thesis with your friends and colleagues first, then move to others in the venture space. With every piece of advice you receive, try to absorb at least one takeaway and zoom in or out of your “secret sauce” characteristics accordingly.
Target the unlikeliest LPs first
Write down any LPs you have a relationship with on a spreadsheet: Anyone who could possibly invest in your fund. Add a realistic guess on how much money they could contribute, and estimate how likely they are to back you (on a scale of 1-100).
Pick three of your contacts that are least likely to back you and share your thesis. These are the ones that will give honest feedback. Tell them the startups you want to work with and how you plan to make money for both sides. When you feel you’ve gathered enough feedback, begin to reach out to additional LPs.
Use your ideal fund size as a legal benchmark
Your ideal fund size is the figure you want to close after you’ve finished fundraising — it’s how you can work out your team size, investing stages and time frame, and how you can determine when to hire counsel. Ideally, you want to wait until you have at least 10 percent of your ideal fund committed by LPs before you hire legal representation.
To get your ideal fund size, go back to your LP spreadsheet and multiply the money you estimated each LP could contribute by the likelihood of them investing. Then times the total by 10 and, voila, that’s the figure you should be orienting around.
Starting a VC firm is one of the hardest things anyone can do in the business world. These three tips will ensure that you don’t fall at the first hurdle and are prepared for the next phase of investment.
Illustration: Li-Anne Dias
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