Venture capital fund closures are a seasonal phenomenon, influenced by factors such as holidays, budget allocation schedules, tax seasons, and the geographic locations of limited partners (LPs). Recognizing and understanding these patterns is crucial for both fund managers and their LPs to optimize their planning. In this article, we’ll delve into the best times to close a VC fund, the importance of planning, and how to prepare for the fund closure process.
Seasonality of Fund Closures
Seasonal patterns significantly venture fund closing timelines. December and January, alongside July and August, are widely regarded as the “funding doldrums” periods. Securing LP funding during these months can be particularly challenging due to holiday celebrations and vacation schedules. Additionally, local and religious holidays may contribute to further funding slowdowns. To navigate these challenges effectively, understanding the annual calendar of optimal closing times becomes vital for fund managers and their LPs.
- Situation – New Year’s celebrations and post-holiday hangovers often lead to a slow start in January.
- VC Activity – Focus on finalizing strategies and preparing documentation for upcoming fund closures.
- Situation – The year starts to pick up pace as holidays fade into the background.
- VC Activity – Begin identifying prospective LPs and secure commitments, aiming for at least 10-20% of the target fund size.
- Situation – An the first optimal time to close as the year gains momentum and the New Year’s doldrums have passed.
- VC Activity – Secure initial LP commitments and execute the fund closure process.
- Situation – The year is in full swing and the first quarter wraps up. This is also tax season in many countries.
- VC Activity – Push to close outstanding limited partners and deploy capital from recently closed funds.
- Situation – A stable month with few holidays, providing ample time for business activities.
- VC Activity – Continue pushing to close outstanding limited partners and deploying capital from recently closed funds.
- Situation – Just before the summer doldrums, June offers a window for optimal fund closure.
- VC Activity – Make a final push with interested limited partners and wrap up investments before the summer.
- Situation – Summer vacations and holidays slow down the funding landscape.
- VC Activity – Focus on portfolio management, networking, and building relationships with LPs for future commitments.
- Situation – The summer doldrums continue, with most people still on vacation.
- VC Activity – Strategize for the remaining year and prepare for the post-summer funding uptick.
- Situation – As summer vacations end, businesses begin to regain momentum.
- VC Activity – Re-engage with LPs, restart fundraising activities, and focus on securing commitments.
- Situation – An optimal time for closing, as enough time has passed after the summer slowdown to build momentum, and businesses are fully operational.
- VC Activity – Engage in a significant year-end closing push to finalize LP commitments, and start preparing annual reports.
- Situation – The year begins winding down, with businesses focusing on year-end goals.
- VC Activity – Continue the year end closing push, assist portfolio companies to hit year end goals, and deploy capital from closed funds.
- Situation – The holiday season slows down the funding landscape, making it challenging to close funds.
- VC Activity – Wrap up any outstanding LP commitment from the closing push, focus on relationship-building with LPs, evaluating fund performance, and strategizing for the upcoming year.
It is essential to note that during unfavorable periods for closing funds, making capital calls can also be problematic. The same LPs who are unavailable or preoccupied during the “funding doldrums” are likely to be similarly unresponsive to capital calls. This unavailability may result in delays in securing the required funds and can have a cascading effect on investment timelines and portfolio management. Therefore, fund managers should carefully consider the timing of capital calls in tandem with fund closures, ensuring that their approach aligns with the availability of their LPs and the overall market conditions.
Optimal Closing Times
While the best times to close a VC fund tend to be in March, June, and October, it’s important to remember that closings can and do occur throughout the year. However, securing commitments during the funding doldrums may prove to be more challenging. If closing a fund during these less favorable periods is unavoidable, fund managers can still take advantage of the time to strengthen their investment strategies and build relationships with LPs.
Here are five recommendations for activities to undertake during the funding doldrums:
- Send a newsletter: Keep your LPs and potential investors informed about your fund’s progress and market insights by regularly sharing updates through newsletters.
- Attend networking events: Use this period to attend industry conferences, seminars, and networking events to expand your professional network, identify potential LPs, and discover new investment opportunities.
- Scout portfolio companies: The funding doldrums can be an excellent time to conduct research and due diligence on potential portfolio companies, refining your investment pipeline for when the market picks up again.
- Focus on portfolio success: Allocate time and resources to support your existing portfolio companies, assisting them with strategic planning, business development, and operational improvements.
- Engage with LPs: Maintain open lines of communication with your LPs, addressing any concerns they may have and keeping them informed about your fund’s performance and future plans.
By engaging in these activities during less favorable times for fund closures, fund managers can maximize their effectiveness, laying the groundwork for more successful fund closings in the future.
The following example timeline for a close is based on the VC Lab program schedule, which has been strategically designed to align with optimal fund closing times. By following this schedule, fund managers can maximize their effectiveness in securing commitments and successfully closing their venture funds.
- Month 1: Begin with a comprehensive strategy, including defining the fund’s focus, investment thesis, and target sectors. Start researching and identifying prospective LPs that align with your fund’s objectives.
- Month 2: Initiate conversations with potential LPs, sharing your fund’s strategy and investment thesis. Begin building relationships and gauging their interest in committing to your fund.
- Month 3: Formalize fund documentation and start the due diligence process with interested LPs. Continue networking and building relationships with potential investors.
- Month 4: Secure initial commitments from LPs, aiming for at least 10-20% of the target fund size. Refine the fund’s marketing materials and pitch deck based on feedback from initial commitments.
- Month 5: Ramp up fundraising efforts by engaging with a wider pool of potential LPs, using the refined marketing materials and pitch deck. Finalize commitments from the first set of LPs and continue to build momentum.
Month 6: Consolidate all LP commitments, prepare all necessary legal documents, and execute the final closing process. Begin deploying capital and focus on sourcing new investment opportunities.
Benefits of Proper Planning
Careful planning and preparation for a fund’s closing timeline yield numerous benefits, including:
- Avoid Being Stuck: Avoid getting stuck for months with a partially raised fund by aligning your fundraising activities with optimal closing times.
- Cost Efficiency: Reduce legal bills and closing costs by consolidating the time to close, resulting in a more efficient and cost-effective process.
- Maintaining LP Relationships: Avoid aggravating LPs by not reaching out to them during vacations or when indisposed, preserving positive relationships and trust.
- Maximizing Capital Commitments: Close on more capital by targeting LPs when they are most likely to invest, increasing the likelihood of securing commitments.
- Realistic Planning: Create realistic timelines that reduce stress and uncertainty, ensuring a smoother fund closure process and more effective capital deployment.
Venture fund managers should not begin planning their fund closures until they have identified at least 10-20% of their target commitments. By understanding the seasonality of fund closures and the various factors that can impact the timing, fund managers can better prepare and plan for a successful close. Remember, planning and foresight are critical components of closing a venture fund, ensuring a smoother process and more effective capital deployment.