In venture capital, a “close” or “closing” happens when a fund has legally secured commitments from Limited Partners (LPs) for a target portion of the intended total fund size. These commitments represent pledges from LPs to contribute specific amounts of capital to the fund. The closing phase marks the initial significant milestone in the fund’s journey towards supporting high-growth startups to their fullest potential.
The journey towards closing a VC fund is complex and layered, often involving multiple stages and a wide array of participants from varied disciplines. The fund typically starts by closing between 10% and 25% of the total fund size. The balance is then raised over two or three subsequent closings across a span of 12 to 18 months. These staged closings allow funds to begin investing while continuing to raise capital.
The first closing generally takes place when a sufficient number of target LPs have signed the Limited Partnership Agreement (LPA), the fund’s primary governing document. After the General Partner (GP) countersigns the LPA, files any necessary regulatory paperwork, and properly notifies LPs, the first close becomes official. Most new managers then immediately initiate a capital call, requesting between 20% to 30%—but often no more—of the committed capital.
This capital is primarily used to pay any organizational expenses and to make initial investments aligned with the fund’s investment thesis. Some managers opt for a “dry close” where no capital is immediately called, but this is not typically recommended for new managers. It is critical for managers to ascertain the willingness of LPs to wire funds as directed.
Read on to better understand the closing process, and what you can expect from each stage.
The Closing Process
Once hard-circled and soft-circled interest surpasses the target closing amount, a 3-4 month standard closing process typically commences involving these steps:
- 1. Engaging Closing Partners (1+ Month): Interview and hire legal, accounting, and back office partners.
- 2. Coordinating with Partners (2 Weeks): Discuss the closing process and set timelines with the partners.
- 3. Producing Legal Agreements (2+ Weeks): Develop the LPA and operating agreements necessary for closing.
- 4. Reviewing Agreements (2+ Weeks): Conduct an internal review and seek feedback from strategic limited partners.
- 5. Forming Legal Entities (1+ Week): Establish the necessary legal entities for the fund.
- 6. Securing a Bank Account (2+ Weeks): Apply for and set up a bank account for the fund.
- 7. Distributing LPA for Signatures (2+ Weeks): Send the LPA to LPs to secure their signatures.
- 8. Closing and Sending Initial Capital Call (1+ Week): Submit necessary regulatory filings, countersign the LPA, send proper notice to LPs, and initiate the first capital call.
It’s important to note that these steps provide a high-level overview and the actual process is often more complex, requiring meticulous planning and execution. It’s essential to ensure that all regulatory, legal, and financial aspects are appropriately handled to ensure a smooth transition towards fund operation.
Fast-Track with Decile Launch
With a view to expediting the traditional closing process, Decile Launch offers a compressed timeline that aims to complete the process within 1-2 months:
- 1. Applying to Decile Launch (1+ Week): Submit your application, undergo the interview process, and if successful, commence the two-month closing curriculum.
- 2. Accelerate Momentum (1 Month – Optional): Build momentum with new and existing LPs to increase your commitments.
- 3. Preparing Legal Agreements (1 Week): Prepare the necessary templated legal agreements and initiate formation.
- 4. Securing Feedback and Bank Accounts (1 Week): Receive feedback on legal agreements and start setting up bank accounts.
- 5. Securing LPA Signatures (2+ Weeks): Distribute the LPA to potential LPs and obtain their signatures (via Decile Hub).
- 6. Closing and Sending Initial Capital Call (1 Week): Submit necessary regulatory filings, countersign the LPA, send proper notice to LPs, and kickstart the initial capital call.
Decile Launch achieves this accelerated timeline through a combination of strong partnerships, world-class template agreements, and integrated technology solutions, ensuring a fast and efficient closing process. The above steps provide a streamlined approach; however, the actual process might vary based on specific fund requirements and conditions.
General Tips for Closing
Successfully closing a venture capital fund requires a combination of strategic preparation, clear communication, and persistence. Here are some general tips to consider during the closing process:
- 1. Maintain Regular Communication: Keep regular contact with your LPs throughout the closing process. Even while closing, it’s crucial to continue pitching to prospective LPs.
- 2. Anticipate Volatility: Be prepared for surprises. LPs that you expect to invest might pull out, while others you didn’t anticipate could come onboard. This volatility is a standard part of the process.
- 3. Follow Up Consistently: You might need to push some LPs to close, often necessitating multiple email reminders, texts, and calls. It is not uncommon to have to remind LPs three to five times to get signatures.
- 4. Stay Positive: The uncertainty of closing can be stressful. Celebrate the small victories along the way and maintain a positive attitude throughout.
- 5. Document Organization: Keep a well-structured and organized system for your closing documents. Having easy access to necessary information enhances efficiency.
- 6. Maintain a Healthy Pipeline: Always have prospective LPs in the pipeline, even if you are close to achieving your target closing amount. This provides a buffer if any current LPs decide to pull out.
- 7. Be Responsive to Vendor Needs: Ensure to meet the needs of your vendors promptly. Their work is integral to the closing process, and timely responses can help maintain a smooth process.
- 8. Set Deadlines: Having a clear timeline with specific deadlines can help in managing expectations and keeping the process on track. This can also drive urgency for LPs to make their decisions.
Bear in mind that closing a venture capital fund is not a straightforward process. It requires meticulous planning, effective communication, and a fair amount of patience. These tips can help you navigate this complex process more smoothly.
Closing with Multiple Vendors
Should you opt to manage the fund closing process using multiple vendors without the support of Decile Launch, here are additional points to consider:
- 1. Bank Account Setup: The process of securing a bank account can stretch into weeks or even months. This often involves the production of compliance documentation, such as an Anti-Money Laundering (AML) policy.
- 2. Vendor Coordination: The closing process involves managing various vendors. This includes identifying who will be responsible for tasks such as reviewing signed LPAs and verifying bank accounts for incoming funds.
- 3. Legal Agreement Review: It’s important to allot sufficient time to reviewing legal agreements. Given their typical length and the intricate legal language often used, securing stakeholder feedback can take several weeks.
Managing the fund closing process independently presents its own set of challenges, making these considerations crucial to ensure a successful closing.
Closing a venture capital fund is a complex but rewarding journey that requires diligence, strategic planning, and clear communication. It’s important to remember that each step forward, no matter how challenging, brings you closer to your ultimate goal: a closed fund ready to fuel innovation and entrepreneurship.
Whether you opt for the streamlined support of Decile Launch, or decide to navigate the process independently, maintaining positivity and resilience in the face of setbacks is essential. By focusing on the outcome–the impactful investments you’ll make in high-potential startups–you can navigate the closing process confidently and successfully. Stay the course, and you will succeed.