I’ve had this CHUNKY FAQ in a google doc for ages – publishing on the blog (still a work in progress & will continue to update) for searchability / shareability. hopefully this can be helpful for someone! thanks to everyone that contributed to this piece as well!
for context if you’re new here:
Hi, I’m Paige Finn Doherty and one of the founding partners of Behind Genius Ventures. Venture is something that sparked my interest three years ago, so I wrote Seed to Harvest, a children’s book about venture capital. That blossomed into me starting an investing practice, and I now invest + manage a portfolio of 33+ startups across two funds at Behind Genius Ventures, remotely from San Diego.
I get asked many questions by emerging managers who are getting started & wanted to create a thorough and collaborative piece. If you add a question or an answer in the comments below, feel free to add your name / twitter link after!
Limited Partner Questions – Fundraising & Investor Relations
How do you navigate finding LPs?
- Depends on fund size. Institutional LPs won’t usually roll out of bed for anything under $25m. Your main source of LPs will be high net worth individuals, and you’ll likely have better timing with recent liquidity events. In Fund I, I focused heavily on general or founding partners at venture firms. – Paige
- As Paige mentioned, the answers range a lot by the amount of money you’re raising, but some high level guidance: I would think about LP construction for a fund in a similar way to investor construction for a company – who are the people that you want to support you and who are you excited about working with over a decade (plus)? For first-time fund managers, the majority of LPs are often first and second degree connections who want to support them. This often includes past colleagues, managers, executives, and even investors in those companies. To the same extent you’d ask “who would want to invest in my company?” I’d encourage you to think about that for the fund – who values your thesis/investment philosophy? Who wants to see more support for a given space/vertical/etc? Who will level up your thinking as you go? – Behzod (@beh_zod)
How does one navigate finding LPs whose interests are more in Funds targeting native startups working in traditional verticals across Africa that are in earlier stages of maturity than what obtains in the rest of the global markets? Lots of focus on tomorrow’s tech unicorns and tech centered startups. How about old fashioned and less urbane focus areas like Palm Oil, micro retail,ethnic fashion etc? – @PhilipAina on Twitter
[unanswered]
What’s the kind of credibility that LP’s would look at to be considered as a first time fund manager? for example – an angel investor moving into fund management can be one such route, will be great get more perspectives @karanveer_s
- ALL of the LPs we brought in for Fund 1 were folks we have known for 5 years minimum or decades. Only targeting folks we had long standing relationships with helped narrow our focus. It is a BIG ask to invest capital on someone’s behalf so it is an easier sell when there is a long history of knowing the GP. This of course comes from a point of privilege but I’d suggest focusing all efforts on your VIPs. Even if they can’t be LPs themselves they can make warm and strong introductions which will move much faster than cold outreach -@MrMikeSmith / @ScrappyCapital
What is a recommended approach for a first time fund manager – focus on fundraising vs ybuilding a deal pipeline? @karanveer_s
Should we go top-down (anchor LP first?) or bottom up (find many LPs and then build traction)?
- I really would have preferred to go top-down and find an institutional LP in our first fund. But from a track record perspective, we were new and unproven. So we built credibility by bringing on general partners at larger institutional firms first. – Paige
- The answer is probably both, but it’s mostly about sequencing in my opinion. We used high net worth individuals that were first degree connections to sharpen our pitch and framing, then went after an anchor whose commitment would basically let us “open up shop.” From there it became much easier to “fill in the round” because the signal existed that we were worth supporting to a certain degree. – Behzod (@beh_zod)
What do you think about guerilla marketing tactics to build social channels at this stage?
- Venture is a relationship business, and it’s a long game IMO. I very much value consistency and quality over quantity, and so we’re focusing most of our time on leveling up our own thinking, connecting with smart people (both operators and investors), and sharing things when we feel like we have a unique POV or need to, rather than investing too much time on that right now. I do think that some funds have meme’d their way into mindshare, but that didn’t feel authentic to us. – Behzod (@beh_zod)
What happens if you are raising a $10M fund but are only able to say raise $5m. Do you return the rest of the money to investors or how does that work?
- I’m wondering if this person means they can only invest 5M during the investment term, rather than only “raise” 5M?
That said, as the question is written, I’d encourage you to think about what’s the minimum amount of capital you’ll be okay running the fund with (which may be “whatever I get”), and then use that number to determine when you want to do “first close” which is the initial capital call. You typically have 18 months from first close to call all of your capital, so you could get commitments for 5M of the 10M you want to raise, and then start calling capital as you continue to raise the rest of the fund.
Something that some funds do (we’ve chosen not to) is charge LPs who enter later interest on their commitments as a way of recognizing that it was the initial LPs who made the fund possible (to speak). Your views will vary on whether or not this makes sense given your LP construction, but it’s a thing. –Behzod (@beh_zod)
- What matters more than the amount you close, is the companies you invest in. People won’t remember if you closed 5, 10 or 15, but the companies you picked. – Saba Karim
How do LPs evaluate fund managers?
- Each LP is different, but the main things that come to mind are:
- Access to unique dealflow that not everyone does. Sometimes this is volume, but in most cases it is just quality of leads.
- Conviction in your ability to pick great companies and help them get to the next-stage; whether its further fundraising, product-market fit, or others. – Saba Karim
- Remember that VC itself, and your firm/thesis specifically, is a product you’re selling to customers – the LPs. LPs themselves are not an expert in the product you’re selling, they’re just matching you into a “VC manager” bucket. The joke goes that VCs take fundraising pain wholesale and deal it out retail… so whatever lessons you’d tell an entrepreneur, tell yourself as you go raise a fund.
Each LP has different buying criteria & processes. If you want “enterprise” LPs ($25M++), you have to have an enterprise sales process, complete with understanding the org structure and leverage points. There are partners, associates, due diligence folks, internal champions, everything you’d expect. If you’re comfortable with “SMB” LPs (small family offices, $100k-$2M checks), optimize for personal alignment with the person who runs it: sell them a cool story that they like, and you’re golden.
For institutional managers, look for folks with “emerging manager” programs, which are looking for young up-and-comers. Of course, those weLPs are pattern-matching what an excellent “up-and-comer” looks like based on internal theses… so my best advice is to ask them what kinds of managers get them excited, and honestly see if you think you fit in that bucket. The basic thesis is smart person, differentiated network, crazy hustle, can win deals, loved by founders, great references from respected VCs.
In general, all LPs like to see that your choices, dealflow, and network are risky and interesting, but your operations & finance are maximally boring. You want to have a crazy Elon Musk on top (that’s you!) and a Glynne Shotwell executing.
Free advice: I’ve found that most institutional LPs want to see that you have broad market access, even if you have a particular sector focus. They don’t really want to invest in a specific fintech fund or a specific SaaS fund (the exceptions you’ll name are the exceptions that prove the rule.) Think about the life of a pension plan manager at a Midwest hospital: they don’t really try to assess the fine distinctions between your thesis and someone else’s; they care about finding a place where they can credibly invest $10M today and $50M tomorrow inside the category of “VC,” generating 5x-10x returns. – Stephen Trusheim
How can your LP’s help you as you’re building your firm and brand?
- Like VCs, they can help with future fundraises, but it’s somewhat rare and requires concentrated effort from you to maximize. Very important to know: institutional LPs talk a lot, and LP references make or break you. If you have an anchor LP, you really want to be their golden child… not just middling, but super enthusiastic. Classic “ask for advice, get money twice:” ask them how you can succeed the most in their eyes, and actually hit those things.
Easiest tactic: Ask everyone who invests for introductions to 2 other folks. – Stephen Trusheim
What should be in my LP pitch deck?
I think the similarities between a startup pitch deck and a LP pitch deck are way bigger than everyone thinks. In general you should focus the deck on five things.
1) What’s your thesis and how will you construct your fund?
Show which kind of companies you will invest in and at which stages. Also give a sense of expected outcomes, the amount of deals you are planning to make and your thoughts on follow-ons.
2) Deal Flow
Where do you generate proprietary deal flow that other investors don’t have? Do you have anything special to get into the deals?
3) The team
People invest in people. No matter if it is a fund or a startup. Make clear to your LPs why you are the right person to run this fund and what brought you here.
4) Your fund’s USP
There are thousands of funds out there. Why does the world need another one? What makes you different and stand out from the crowd.
5) References / Traction
Have you already warehoused some deals, have run a syndicate before or invested as an angel or at another fund? Include any kind of traction from the past to show that you are doing a good job as an investor.
I would also always try to get some inspiration from the LP decks of fellow fund managers. You can find a whole bunch of them online our just reach out to the community. (Maximilian Fleitmann – @MaxFleit)
Adding some feedback from Hunter Walk I got on our Fund 1 deck: (@paigefinnn)
- slides could be “what we believe,” “why we believe this,” “how we find these companies” and “what’s the investment model”
- the fund size and check size – (a) are you holding any reserves for follow-on or deploying all into first checks?, (b) is this the check size you deployed into the example investments? [ie have you been able to already prove you can get this allocation], (c) what’s the return goal for the fund? [i assume your data room has a portfolio model xls that shows how you think you get to 3-5x return target]
- from like a bulleye-metaphor, are there types of companies that are in the core target (industry or verticals, types of founders, round sizes, etc) and then examples of what’s non-core but you’ll still be investing in/seeking out
- what’s the support model – once you get into these companies, what do you help with?
Helpful Content:
- In depth technical piece I wrote on Docsend on how we got to first close:
Company Questions – Sourcing, Analyzing & Winning Questions
It feels like thesis, credibility in making solid investment decisions, and access to deal flow are key differentiators for fund managers. Do youa get pushback there? If so, how did you respond?
Every VC in the history of time gets this pushback, ironically across their whole career. First you’re too junior and so have no track record, so why would anyone believe in you? Then you’ve had a win, but was that a fluke? Then you’ve had a lot of wins, but are those relevant now? Are you still hungry? Or maybe: sure you’ve had wins at a smaller scale (e.g. $50k angel checks), but will those translate to the stage you want now (e.g. $5M lead checks?)
Active LPs see hundreds or thousands of pitches per year. You’ve gotta stand out and give people a reason to believe. Yes you’re smart and you hustle and have a good network… but so does most everyone else. So yeah, honestly, why you? How can an LP see that you’re the best fund manager they’ll invest in this year? (The answer to that question is the investment thesis that your LPs will write down… so write it for them!) – Stephen Trusheim
What if you have a big gap between your personal expertise and your fund thesis? If so, did you need to “close” this gap?
Other than the core necessities for a fund creation (developing a solid investment thesis, securing funding and LP’s, having access to solid deal flow) are there other core steps that should be taken when starting a brand new fund? Or anything you did that turned out to be critical to your success? – Kyler
The most important choice to make when you set out on becoming a VC is: what are you trying to build? The basic choices are:
- A track record and reputation to later “go traditional”. Success is that you later raise a full VC fund, join a big VC firm as a partner, etc (easiest: SPVs, rolling funds, 506(c))
- A “super angel” platform: it’s the you show, not a whole VC firm. You want to do all the fun stuff, and success is that your name is bigger. Maybe one day you’ll change over to 1 or 3, or maybe you’ll just cruise. (easiest: rolling funds, AngelList funds, raised from your network and other lower-stress sources)
- A full-on VC firm. Success is that you’re bigger than Sequoia or a16z. (easiest: build the whole platform from Day 1; see Paige’s advice below)
My biggest learning as a VC is that there’s a big difference between being a VC and running a VC firm. Being a VC is the “fun VC stuff” – finding companies, investing in them, helping them, etc. Running a VC firm is the job of a CEO: your main job over time is to build and manage teams of teams, set strategy & vision, find investors, pitch endlessly, and everything else like that. It’s just as hard to run a VC firm as it is to run a company. It can easily take up 100% of your time, so you can miss out on the thing you wanted to do the whole time!
If you want to start your own VC firm, you have to think of yourself as a seed-stage company (your company being your firm). That is: you’re at a “seed” level of development pitching a nascent story that works today at $5-50M AUM; as you execute on that, you’re deepening the scalable infrastructure & differentiated wedge that powers your success as a multi-$B fund complex. LPs like that story! They want to be prescient selectors of the next great VCs, and that success metric is historically $1B+ AUM. Build your own infrastructure from day 1 in every critical function, learn how to optimize every choice, and take ownership like a CEO does.
If you don’t really want to run a firm, don’t try to optimize or adopt all the trappings of a traditional VC firm. All you really need is (1) money and (2) opportunities to deploy that amount of money. Everything else is noise. Run the easiest & cheapest tools (AngelList or Carta fund management, whatever), pick the default legal options, and find good advisors. None of the bells and whistles are worth the squeeze, and the default options pass due diligence. So you can get back to the fun part! – Stephen Trusheim
Fund Management Questions – Advisor / Team Compensation, Taxes,
As a fund manager, am I required to obtain any certifications or qualifications to raise funds from investors (i.e., Series 7, Series 63, Series 66)?
[unanswered]
For fund managers out there, what compensation do you give your advisors?
This is pretty broad. My quick 80/20 is to refer to seed-stage equity percentages, in carried interest. That is, if a seed-stage company would pay 0.5% in equity for the advisor, I’d pay 0.5% of the carry on a $10-50M fund. It’s not perfect, but it makes enough sense to get people across the line. If the person could invest in the fund, I’d give them 0 fee / 0 carry investment on top of a reduced carry % (and really demand they invest, honestly). – Stephen Trusheim
When do you have to incorporate the fund?
- I think the question as to when to incorporate a fund depends on the applicable law within the jurisdiction where the fund is situated. – Theophilus Emem
- Form your firm (i.e. your management company) first. Don’t worry about actually incorporating the fund until there’s a fund to incorporate. It’s pretty normal to actually form the fund only a week before the first close. – Stephen Trusheim
How do I pick between a rolling fund and a traditional venture fund?
A rolling fund can be a great tool for first time fund managers. With a rolling fund you can begin accepting LP commitments and start writing small checks immediately to build up your investing track record and build a following around your fund. You can also raise in public and be able to talk more openly about your fund since Rolling Funds are 506(c) funds. AngelList has a great support team to handle all of the back office, compliance, and administrative burdens for a first time fund.
If however, you have a larger number of institutional investors planned for your fund, you may want to consider a traditional fund as the Rolling Fund’s relatively new structure is more unfamiliar for institutional investors and they tend to shy away from structures they do not understand well. So if your first fund is likely to be filled with mostly High Net Worth individuals and you want to write investment checks quickly without a 1-2 year wait for your first close, then a rolling fund may be right for you. But if you plan to aggressively target institutional investors and have strong relationships there, you may want to focus on the traditional fund. _ Kyle Chernick
What is 506c?
In short, 506C allows for general solicitation in pursuit of attracting new investors. Furthermore, advertising to the general public in as long as it remains in the purview of Regulation D. Moreover, the issuer must take measures in good faith to assure the investor(s) are accredited and verified in such nature. -dimtrivoss
When starting your first fund, is it better to go the 506(B) route or 506(C)? – dimitrivoss
How should you identify, analyze, and choose a fund administrator?
[unanswered / in progress]
- Software: Carta, AngelList, Allocations, Assure vs Boutique Fund Admin Shop
- Service
- Level of Automation vs Complexity of Fund Model
- Cost
When do I incorporate? What does the paperwork look like?
We started from scratch at BGV. When working with lawyers, it was difficult for us to wrap our hands around the entirety of what we were deciding & how our answers to short questions affected our legal documents & how we operated the fund. We got a lot of advice from other fund managers on our questions, as well as many many emails back and forth with our great lawyers at Wilson Sonsini, so we’d love to share our learnings!
This is not legal advice, merely a retelling of our minimum viable legal journey to first close while thinking of building a firm. I will caveat this piece by saying, there are definitely easier methods to legally set up and run a fund, but we felt this was the best way to build a firm.
We’ve enjoyed working with the folks at Wilson Sonsini, and would recommend you reach out to other fund managers for recommendations for legal counsel that would suit your needs. We’d recommend engaging with lawyers at the beginning of the process, and it’s common practice to ask to defer costs until your first close.
Beginning of Fund
- Submit details of fund to Lawyers
There’s no boilerplate LPA yet, so that’s why you submit the fund details in the beginning. Your counsel will use these details as the basic building blocks of your LPA. Details you should consider include:
- Anticipated Fund Size
- Management Fee Structure & Carried Interest
- Investment Period
- 506b vs 506c. Minal Hasan wrote a great article about AngelList’s rolling funds here, but you can publicly solicit investors with a 506c fund. It’s a bit more expensive as your fund administration platform has to individually assess each investor’s eligibility.
- Number / Names / Contact Info of General Partners
- Geographic areas you will be investing in
- Legally form Limited Partnership, GP And Management Company with Cogency Global
- Your LP, or Limited Partnership, is the entity that your Limited Partners will invest in and it is the entity that invests in startups.
- Your GP, or general partnership, is the management’s stake in the fund. General partners receive their distributions
- Your management company is the overarching owner of the LP & GP for each fund. You pay expenses out of your company, and it often owns the brand assets of your firm as well. While a management company is optional for a Fund 1, we chose to spin one up because of the horror stories we’d heard from other founding GPs who had issues spinning them up after they had finished deploying fund 1. Obtain the EIN’s for Each entity listed above – you’ll need them for future filings
- Create Term Sheet/Summary of Terms
Obtain Fund Admin
Fundraising Starts
- Create Limited Partner Agreement (LPA)
- Details your relationship with Limited Partners
- Anything that goes outside the “standard” fund model should be included:
- Cashless contributions
- Distributions. Some LPAs give GPs full control over whether they have to sell stock immediately upon exit
- Recycling: Aim for up to 120%
- Checks Under Min Size: note if you’re able to call 100% up front
- When you pay your GP commit: recommended upon each close. You pay at the same clip your LPs pay at
- Double check that your lawyers included everything you requested & did it correctly. No one is perfect & this is an especially crucial document to read through. It’s also 100+ pages of legalese, so we recommend a printed version & a highlighter.
- Create Subscription Agreement
- Carta provides their own subscription agreement, which is boilerplate
- Should get one from the lawyers as well to match your fund administration
- Once you fill out a subscription agreement once as an LP on Carta, you won’t have to do it for other funds.
- You can sometimes forgo investor questionnaires (saves time and legal fees) – check with your counsel.
Verbal Commitments
- Submit GP Questionnaire (Only needed if there is more than 1 partner)
- Ask the lawyers for your GP questionnaire to determine which parts of the GP agreement you and your partner want to agree to. This includes vesting, voting, etc
- This is not a legally binding document, think of it as brainstorming for your GP agreement
- Create GP Agreement
- Try to keep it pretty boilerplate
- Any changes? Side letter time!
- Most of the LPs won’t see the GP agreement but some institutional LPs may request it in diligence for larger funds
- Legally defines who owns what & binds you to a partnership
- Hand-sign Form ID POA (optional but helpful)
- Essentially gives your legal counsel the ability to complete, execute, and file EDGAR filing codes with the SEC
- Apply for EDGAR Codes
- EDGAR stands for Electronic Data Gathering Analysis and Retrieval, and your EDGAR codes are the SEC’s way of tracking you. You can think of EDGAR codes like a barcode or school id.
- This will be filed with the SEC by either you or your counsel
- You need EDGAR codes to file a Form D
(1 Day before fund Closes/Launches to not disclose information)
- Submit Form D to SEC
- A FormD informs every detail about your fund: location, partners, amount raised
- File this 1-3 days before first close if you don’t want to disclose the amount you’ve raised
- Must be within the first 15 days of first close
- File Form ADV and Setup account with Finra
- Lawyers will file the ADV with the SEC using the power of attorney
- Gives partners ERA status: exempt reporting advising status. Makes it so you don’t have to register as
- If you have greater than $150M in AUM you must become an RIA
Keep Fundraising until final close
- Fundraising for your second fund starts the moment the first fund closes. – Saba Karim
- It never ends 🙂 – paige
Emerging Managers Tool Stack
What tools do I need as a fund manager?
Choosing the right tool stack for your emerging fund is vital. You don’t want to spend too much time on operation burdens, especially if you are quite tight knit on your mgmt. Fees in your first fund.
Most tools fall in one of the two categories:
- Tools that can make a difference for your fund performance. This includes tools for proprietary deal flow, portfolio value creations, or tools used for sourcing deals that no other fund has.
- Tools that improve operational work. This includes managerial things like fund admin or LP reporting.
There are different approaches on choosing a stack:
- Best of Breed: This is where you’ll just use the tool you like the best in a certain category. For example, you’ll use one tool for a CRM, another one for deal sourcing and a third one for portfolio management.
- One size fits all: There are a bunch of tools uprising, that are covering most of the work you will be doing in your fund. The benefit here is managing less tools and often also less of a cost but often they won’t be as good as the tools that are dedicated to one use case.
(Maximilian Fleitmann – @MaxFleit)
What are the most important areas I need a tool for?
| Category | Provider |
| CRM | Affinity, Attio, Pipedrive, 4degrees, Dealcloud, Foundersuite, Hubspot, Salesforce, .. |
| Captable / Equity Mgmt. | Carta, Pulley, Ledgy, Global Shares, Capdesk, Cake, Shareworks |
| Portfolio Mgmt. | Kushim, eFront, iLevel, Visible.vc, Rundit |
| Fund Admin / Reporting | Ark PEs, Totem, Betterfront, Floww |
| Subscription | Fundsup, Passthrough, |
| SPV / Fund Infrastructure | Allocations, Angellist, Assure, Vauban, Odin |
More tools for every category can be found at https://vcstack.io
(Maximilian Fleitmann – @MaxFleit)