The Art of Raising a Venture Fund

aising a venture fund can be a rigorous, challenging and time consuming endeavor. But it can also be incredibly rewarding! 

If you’re beginning your journey of being a fund manager, there are a few critical factors to consider and by understanding the art of raising a fund, you can significantly improve your chances for success. 

Three Things to consider when raising a fund:

1. Build an Attractive Resume

To attract interest from potential limited partners, it is imperative you approach this from a thoughtful and intentional mindset about what makes your offering truly unique. To drive interest from potential investors, consider building a resume that includes achievements and acknowledgements of outstanding merit. 

Examples of such accolades could include unique capabilities from your team, incentives designed into your fund, the superior status of your past investments, etc.

In a nutshell - your track record is super important! You want to instill confidence in your LPs and prove to them their money is in good hands.

Take this quote from Ali Rosenthal, Founder and Managing Partner for Leadout Capital that eloquently sums up some things to consider when raising a fund:

“Clearly communicate how you will source opportunities and then demonstrate your ability to select. The former requires demonstrating an existing network or a specific fund strategy. The latter can be accomplished by exhibiting a proven track record.”

As you can see, it’s critical that you make sure that you are taking the necessary steps to build your reputation and credibility as a fund manager. LP’s have certain goals they need to achieve, and they need to know that your team is capable of doing so. 

To achieve success as an emerging fund manager, your team’s capabilities and past achievements should align with your thesis. Show potential LPs that you can win deals and generate positive outcomes.

Elizabeth Yin, Co-Founder and General Partner of Hustle Fund urges you to: 

“Focus on storytelling why you are different. There are thousands of emerging managers that come from fancy schools, have FAANG experience, and have successful exits and investments. Just like how startups need to differentiate their products and companies, the same applies to funds.”

2. Choose the Appropriate Fund Design

There are three types of fund designs:

1. Traditional fund – one time commitment with 10-year lifecycle

2. Rolling fund – flexible quarterly investment opportunities

3. Syndicate fund- deal by deal

Whether you decide to raise a fund with a traditional model or newer model, it is essential to choose a fund strategy that accurately fits the needs of your LPs. Once you decide on the type of fund you’d like to raise, then you can begin to explore fee incentives that will make the offering more attractive to investors. 

You can be strategic in the way you decide on fees by making favorable adjustments to the typical fee structure that will incentivize LPs to invest.

"Generational and succession planning is really important. As much as having the right team in place is a selling point when fundraising, not having a plan for how fund management will evolve can be detrimental,” says Kelsi Kamin, Chief of Staff at Living Security.

“It’s critical to show LPs that you are building a team with investment professionals who will successfully lead the firm into the future, and who are equipped to drive requisite returns when the senior GPs eventually transition out, whether that’s for retirement or political reasons or otherwise. It takes a really long time to prove this."

Plan Your Campaign Strategy

When composing the dynamics of your fund, as an emerging manager, it is important to determine the strategy you are going to use. For example, a fund strategies can focus on an ownership target in companies or it could focus on creating multiples on your money to maximize returns. 

How you decide to allocate your capital, emerging fund managers should consider taking the time to determine the strategy that best suits you and your LPs.

As you develop your fundraising campaign, it is important to split your process into two phases:

1. the qualification phase

2. the outreach phase. 

The investor qualification phase involves taking the time to research LPs and their criteria for making investment decisions.

Examples of LP’s include high net worth individuals, ultra-high net worth individuals, endowments, family offices, fund of funds, asset managers, and endowments. Each of these LPs have a different focus. By knowing what each group is looking for, you can customize your talking points and focus your pitch on what is most relevant for that group.  

Additionally, during this time, you can reach out to prospective LPs and begin to grow your investor network. When building these relationships, get to know what the LP is looking for in a fund, make a connection, build trust and get honest feedback before you do a full pitch. 

Taking this efficient route instead of a cold approach will allow you to be more strategic and signal confidence to LPs. In short, doing your research pays off. In addition to doing your research while gathering contacts, leverage your existing networks to get warm introductions to LPs from people who will advocate for you. Finding a way to personalize your outreach will yield a much better response.

“Large LPs like to develop relationships for 6 to 9 months before investing, so it's best to start the conversation outside of the more transactional context of a fundraise,” says Addie Lerner, Founder and Managing Partner of Avid Ventures

Once you have a targeted list of prospective investors you want to pitch to, you can move forward to the outreach phase. During this process, you reach out to qualified investors that you feel are a good fit for your fund and schedule formal pitch meetings. 

Be sure to also identify the investors that will have the most interest in your thesis and prioritize securing those contacts. Remember to keep track of time during this phase. Set hard deadlines for the close of your fund and allow enough time to adjust the process for any unforeseen circumstances. 

One way to successfully track all your potential LPs and follow up promptly is to set up a customer relationship management (CRM) software. The VC business is heavily based upon relationships, so it’s never too early to build your CRM to ensure that you maintain those relationships as thoughtfully and efficiently as possible. Some CRM tools include Google Docs, Air Table, Notion, Affinity, Copper and Salesforce.

Ultimately, the art of raising a fund comes down to consistency and persistence. Building a VC fund is hard work, but once you find people who believe in your vision, you can lean into those communities for support, resources, and contacts.

To summarize: demonstrate your track record and ability to win deals. Be able to explain what differentiates you from other VC funds. Build your relationships with LPs early and customize your talking points with each qualified lead. Prioritize the most promising potential LPs and invest in CRM. Overall, it’s important to learn as much as you can about the venture deal process and do the best you can along the way.

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