How (not) to start a VC Fund?

Repeating other's mistakes

At Vauban, we get the benefit of meeting some of the most brilliant minds in venture investing. We especially like working with those venture capitalists with a true passion for making startups grow into the next unicorn.

But the road is fraught with bumps from - time to raise capital, sourcing deals, and getting the fund up and running in time to deploy. It is unsurprising that the process for first-timers can take anywhere from 3 to 17 months. Here are a few trends we've seen the best VC's successfully avoid and how they did so.

Treating your pitching like a boiler-room

So how do you pitch like a pro? Here are some tips we have come across:

  • It is obvious that warm introductions are always going to get you closer to that first check. But knowing how to pitch smartly is crucial. Focusing on sectoral strengths (DeepTech, EdTech, FinTech, etc) and a compelling investment thesis aimed at the right audience can really distinguish you from the rest. 
  • Although the fundraising process can feel like a sales process, the personal element is far more powerful than getting more leads in the funnel. There is a very weak correlation between the number of LP meetings you have and the amount you raise. Make every meeting count, be prepared, and don’t expect a yes from those first meetings - no one wants to be that first anchor. 
  • Try offering a rolling close to get people engaged early. 
  • Put a target number of meetings you want to aim for and try not to overshoot. There is enough on your plate to achieve outside of sourcing capital. 
  • If you can, don’t throw yourself into solving problems by using brute force and convoluted excel sheets. We have seen some great technologies used by VCs to extract the most value from their network. We have an article coming up soon with some of our favourites - so watch this space!

Running before you can walk

In classic project management theory, you say that you can’t deliver Cost/Time/Quality in one go. The same goes for your choice of fund vehicle - you are going to have to compromise.

Setting a venture fund is not a simple affair and requires significant time and effort as you are asking people to trust you on a larger check size without having any concrete information on your proposed targets. Your investment thesis and track record are the only tools of your trade. 

Some newer first-timers are wising up to this, and realising they can build that track record with LPs through deal-by-deal transactions (SPVs), which can lead to a larger fund. This is particularly useful for principals and associates who have the prior VC employer branding behind them but can’t cut those first checks.

Not being cost-conscious

You may think that applying a “2 and 20” approach (where you receive 20% as carry interest and 2% as a management fee) is the simplest way to go.

First-timers will soon realise that LPs are very cost-conscious and will look to squeeze the fee structure. Some VC’s counter this by starting higher and then having room to negotiate, but be prepared to have to cut down on the management fee in particular. This will be a tough call on your end as these funds are what you use to pay the bills. 

To ensure you really have wiggle room for negotiations, think about optimal cost structures. If you can reduce your initial legal costs (which tend to be the most painful upfront hit on your IRR), as well as ongoing costs (e.g. look at cost effective fund administrators).

Arik Oslerne