"Recruiting LPs is more than simply just raising money. It's about building long-term partnerships that help you create the most value possible for your portfolio companies and all partners involved" - Jeff Weinstein, FJ Labs.
How to raise the Fund I?
From whom: Venture capital GPs typically raise their first funds from friends, family, and high net worth individuals or family offices.
LPs ticket size: Investments typically range around $50,000 to $1M.
Fund size: US$10M-US$50M
Specificity or Focus area or Investment thesis: "LPs are constantly inundated with decks. The winning pitch is one of specificity. Start with a sector, business model, or geographic focus. For example, FJ Labs focuses on investing in online marketplaces, so we pitch our expertise in the understanding marketplace and our track record of building and scaling online platforms."
Angel Investing track record is a plus if you have it. It is essential to document it, with supporting evidence carefully.
What's the value add and differentiating factor for the founder to take your money? Why are you going to win this deal? How are you going to compete with other investors?
Co-investing opportunities to LPs: "offering frequent co-investment opportunities can be a big incentive for family offices to invest."
Other interesting insights related to fundraising for the Fund:
Corporates as LPs: "Corporates are also starting to invest in venture funds, but they aren't necessarily primarily financially minded– they're doing it for strategic purposes. They care about seeing companies that potentially disrupt their current lines of businesses, scoping out future lines of businesses without heavy internal R&D involvement, and companies they could potentially M&A."
Example of FJ Labs: "FJ Labs will have over 250 companies in our current fund, and corporates love it because they're getting a ton of exposure to a variety of sectors, business models and geographies," notes Weinstein. "Being an LP with FJ Labs gives them access to emerging trends and deal flow they otherwise wouldn't have access to."
A big NO-NO (while raising the Fund II): "LPs don't want to see GPs leaving or dramatic team turnover."
Consultants Gatekeepers or Mafias: "Consultants serve as gatekeepers for endowments, doing much (if not all) of the due diligence and benchmarking for institutions. They can make or break your Fund."
Type of LPs:
Corporates: "corporate LPs might invest for knowledge transfer (understanding potential companies or business models that can disrupt their core holdings) or strategic positioning (looking for future startups to acquire)."
Fund of Funds: "fund of funds managers may prioritize financial returns,"
Family offices are much faster in deployment than large institutional investors
Lack of experience understanding this asset class: "LPs with a lack of experience with the venture asset class also tend to want a certain level of control. You typically don't want to be the first venture investment for a new group because you run the risk of them wanting an excessive amount of influence over your decisions."
Avoid outrageous requests: "Of course, every LP should do their due diligence, but it's usually a bad omen for the future relationship if they send a billion questions for every minor action," says Weinstein. "They'll likely continue to do that, and you need to spend the bulk of your time running a fund, not answering overkill diligence questions."
Make your LPs feel essential – they are!
"Corporates are getting more involved, and family offices are becoming far more interested."
"Due to negative interest rates in Europe and Japan, there is a large number of investors looking to move up the yield curve and try to earn a larger return."
References and useful resources:
I am continuously looking for first-time funds and first-time fund managers who are looking to create their first-time impact funds with an edge or a differentiated value proposition in emerging economies. If you are building one, please do write to me. I would love to learn more from you and would be happy to help in any way.
Occasionally, he blogs about the responsible investing, tech for good, venture capital, investment thesis, conscious capitalism, collaborative consumption, community, and humane lifestyle.