Below is an account of seven of the many lessons I’ve learned (and unlearned) in fundraising over ten million dollars. If you have questions, feel free to leave them in the comments!
Some basic definitions before we get started:
- Limited Partners (LPs) are investors in a venture fund. They must be accredited investors.
- Structure of a VC Fund Fundraise: A VC Fundraise starts with “pre-marketing,” the period before fundraising officially kicks off, then “first close” when you countersign your first LP subscription docs and admit people into the fund, then usually 12 months of official fundraising, and a final close.
Lesson #1: Talk to other fund managers
Talking to other fund managers about what they learned is the best way to learn more about this process. There’s very little written online about this topic, so it was something I had to seek out. Thank you to early and candid supporters like Eric Bahn and Elizabeth Yin from Hustle Fund, Arjun Sethi from Tribe, Andy Weissman from USV. I also got to interview many emerging and established fund managers about their fundraising processes on my podcast Seed to Harvest, which some popular ones being Mar Hershenson from Pear VC, Niki Scevak from BlackBird VC, Ben Lerer from Lerer Hippeau, Closing a $31M Fund with Rishi Taparia.
Lesson #2: Decide on your constraints
There are some core decisions to make here before finalizing materials that will impact who you chose to fundraise from.
- Team. How many General Partners you have.
- Size. How big of a fund are you looking to raise? $5M? $10M? $50M? $78M? $150M? This will impact the types of LPs you speak with. Most funds sub-$25M mainly raise from individual LPs or smaller investors, while most funds above $50M raise from institutional investors.
- Portfolio Construction. I have a theory of constraints: Constraints are great. They help you make decisions. Portfolio construction is perhaps your most important constraint. Some LPs will only invest in concentrated managers (less than 25 investments per fund). Some will only invest in diversified managers (40+ investments per fund). Some don’t care as long as the portfolio constructions fits your style. I’ve traditionally raised for ~25-30 investments
- Thesis. What are you going to invest in?
Your materials should reflect the above, and the best decks usually use case studies from previous investments as grounded proof points.
I must have had 100s of variations of an intro deck along the way. I go into detail in my blog post from three years ago on this topic in my emerging manager FAQ here. There’s also a website with some successful VC fundraising decks here.
Lesson #3: Prospecting is incredibly manual. But this is actually a good thing.
Prospecting, or building a list of LPs, in our first two funds was probably the most challenging part. For startups, there are tons of lists of “VCs investing in [x] space.” For VCs, there’s not a lot of publicly available data on which LPs are actively investing and in what. You can pay big bucks for Pitchbook, but even then the data can be inaccurate.
Most fund of funds that invest in emerging (Fund I – III) managers are inundated by pitches, often raising their own funds, and take a while to make a decision. In almost all cases, you’re better off starting with high net worth individuals. (unless you’re a spinout from a top fund, like a16z, Sequoia, Thrive, Lightspeed, Khosla then absolutely go after those folks.)
Lesson #4: Warm Introductions in a Fundraise Yield Best Results
In Behind Genius Fund I, 34.7% of our LP capital came form people I met on Twitter. $1.47M from Twitter. An additional 16.5% came from introductions from existing LPs.
In Behind Genius Fund II, 68.7% of our capital came from existing LP referrals from either Fund I or Fund II. $6.11M in referrals.
For us, the best way to close an LP is through a warm introduction through an existing investor.
Be selective about who introduces you. Much of this selectivity is understanding the strength of the relationships between you, the person who is referring you and your prospective LP. The “highest scoring” relationship is usually an existing investor of yours referring you to someone they know well. On both sides, the relationship is strong.
This is why taking on smaller checks earlier in a fundraise from folks who can introduce you to other potential investors is really helpful. There was one LP in Fund I that wrote a $50k check who introduced us to an LP who wrote a $300k check, and then LP #2 introduced us to an LP #3 who wrote a $1m check in our Fund II.
As I illustrate in the diagram below, your results of closing a prospective LP will be much higher if your introduction is through an existing manager they have worked with in the past (ideally one that is performing well) or an advisor to them.
This is similar to the advice I give the founders we work with – spend time building genuine relationships with founders who have raise 1-2 more rounds than you who can make strong introductions.
Tactically, Roy Bahat has a great blog on how to write a strong forwardable email here.
Lesson #5: The Goal of a First LP Meeting is Clarity on Alignment
The goal of the first LP meeting is not about making someone like you, closing a check, or selling someone – it’s about getting to clarity of your alignment. Basically – finding out any constraint that would mean an LP cannot invest in your fund – liquidity, strategy, investment mandate, lack of interest etc – in the first meeting.
Far too often, I speak with fund managers who don’t properly qualify an LP in their first meeting. Some say they do this to “preserve a relationship,” but I find the best LPs appreciate my candor in asking these questions directly.
This perspective is mainly derived from having an abundance mindset – to quote Elizbeth Yin’s blog on raising their first fund “the world is filled with infinite money sources, and it’s my job to find the right matches as quickly as possible.” This mindset also helps the fundraise feel less like personal rejection, which it definitely can.
Tactically, here’s a sample list of qualification questions I like to ask:
- What’s been your previous history of private investing in start-ups and venture funds?
- What’s your average check size?
- How many new investments are you looking to make this year?
- What constraints, if any, do you have on investing in VC funds (more institutional oriented)
At the end of the call, ask what resonated & what remains a mystery to them. This will give you a good idea of how to tailor your followups (next section). I would also take some notes on how you felt in the meeting. Is this an LP you’d be excited to work with? Share exciting and challenging news? Did you sense anything fishy?
Lesson #6: You’re not done following up until you hit 9 unanswered
I learned this at my old growth equity firm TVC, where we would cold call and email founders. Our sales advisor Nelson would say, unless there’s 9 unanswered emails, keep going till you get an answer.
A common mistake is not following up enough. I once landed an LP from a top fund because I sent seven followup emails. Will some people think that’s annoying? Yes. Will the right LPs know I’ll also be relentless in pursuing investment opportunities I deeply care about? Also yes.
I liked sending a short one sentence about something exciting in our portfolio, space or fundraise happening every few days.
Lesson #7: Use a CRM
Use a CRM. Take good and opinionated notes. Keep it nice and tidy. This makes your journey so much easier.
Which CRM? It really doesn’t matter. VC Fundraising is a sales process, so use what ever works best for you and is inexpensive. There’s VC-focused CRMs out there that claim a bunch of AI features, but I’ve seen folks raise $40M+ with a simple google sheet.
I love Close.io because it’s what I started with & it’s simple. As for process, when I send a follow up email after a call, I add a task to follow up in three or four days with a sentence on fundraising or portfolio traction. And again. And again.
Common Questions Asked in Fundraising:
If you’re starting your own fund, here are some example questions you can expect to be asked in a meeting or over email:
Anyways, fundraising is hard. It takes longer than you expect.
But, it’s an incredibly rewarding process and you’ll meet incredible people along the way. I am so grateful to my family, friends, and our amazing community of investors, founders, and friends in the industry who have helped me turn this dream into reality. Hope this was helpful!
I also made a short video below about my Fund I process, and am hoping to do one on my Fund II soon:
Disclaimer: this is not an investment solicitation. the views above reflect my personal beliefs, and not those of my company. the information above is purely for informational purposes to help other emerging managers in their journey.