Raising a venture capital fund can be challenging regardless of how many times you’ve done it. Though the process certainly can get relatively more manageable each time, fund managers may want to set out a well-thought-out plan in each of their fundraising campaigns.
When strategizing fundraising, a key factor to consider can be the minimum investment threshold. This can be an integral concept for first-time managers as a threshold may help manage and optimize time interacting with potential investors It can also help managers build traction and run an efficient fundraising campaign.
Table of Contents
- What is a minimum investment size?
- Why have a minimum ticket?
- Threshold guidelines
- Fundraising strategy
- Other factors
What is a ‘minimum investment size’?
Venture capital funds commonly have a minimum level of investment they are willing to take from limited partners. This is due to matters of efficiency in fundraising and fund administration / operation. Those seeking to become investors in the fund typically have to meet this threshold. They do this by ‘committing’ the required amount of capital set forth by the fund managers as opposed to investing a sum of their preference.
Why have a minimum ticket?
To get to a quick close and run an efficient campaign, fund managers often set minimum thresholds as part of their overarching fundraising strategy. At times they adjust this level depending on the closing and the traction of the fundraising campaign. Managers also do this to manage the number of LPs and avoid operational / administrative challenges. It can be important to note the connection between minimum ticket thresholds, the desired fund size, and the number of investors in the limited partnership.
Refer to the following article to further examine the relationship between minimum ticket sizes and ‘The Ideal Number of LPs in a Venture Capital Fund‘
Typically, the larger the fund, the higher the investment threshold. As shown above, GPs may want to consider adapting their fundraising strategies along with the number of closings. The strategy for a first close can initially be to focus on small checks from immediate HNWIs / connections. With each subsequent close, managers can gradually increase the threshold and shift their focus to larger LPs, who typically wait for funds to become operationalized. When utilized in the right manner, this strategy may be useful to gain traction and leverage momentum in your fundraising efforts.
The minimum investment ticket size can be calculated to account for the ideal number of LPs and the fund’s aimed size. An optimal number of LPs for a VC fund may range between 25 – 30. For matters of operation and administration, when setting a minimum investment threshold, it can be useful to set an amount as not to exceed 50 LPs.
For more information on how minimum investment thresholds tie into a fundraising strategy, refer to VC Lab’s article, ‘The Ultimate Guide to Get LPs.’
When setting a minimum investment size, it can also be worthwhile for new managers to evaluate other relevant factors regarding their funds. This can be region, stage, and traction, to name a few. For example, the venture capital asset class is prospering in western countries like the US. However, in emerging markets such as Africa, LPs may be scarce and unwilling to invest significant capital into a new manager. In such cases, you might want to regard these additional factors when determining a suitable investment threshold for your fund.
Another factor to consider can be local regulations. For example, not setting an adequate minimum investment threshold may sometimes result in the fund having too many LPs and consequently violating decrees set forth by local regulators. The SEC has placed limitations on the number of LPs an unregistered fund can have in the US. Exceeding this limit can cause burdensome administrative and operational challenges which fund managers typically want to avoid.
As outlined in this article, there are a plethora of reasons why it is generally beneficial to have a minimum investment threshold. When thinking about making exceptions, considering these factors can aid your decision-making.
In some cases, fund managers may choose to reduce the minimum investment threshold for close acquaintances and family members. In such instances, you may want to consider the long-term implications for your fund. When doing so, it can be helpful to manage the number of exceptions in order to maintain the optimal number of LPs in the fund.
VC Lab runs accelerator, the four-month accelerator for venture capital firms and venture builders.
Cohort 6 starts in February and will help participants from around the world close on capital and start investing by June of 2022.
Learn more and apply here