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Minimum Investment into a VC Fund

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.

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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

Threshold guidelines

min investments
Guidelines for minimum investments into a new VC fund

Fundraising strategy

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.’

Other factors

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. 

Exceptions

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

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The Ideal Number of Limited Partners in a VC Fund

Many new fund managers ask us, “What is the optimal number of LPs in a VC fund?” Having powered the launch of over 100 VC firms worldwide, we’ve gathered valuable insights into the ideal number of investors for new funds, which we believe to range from 20-30 LPs. Intuitively, one might think that having a vast LP base is always advantageous. However, this may not always be the case, as this article will explore.

We’ve seen a tendency from new fund managers to aim for an extensive base of investors. Unfortunately, this can sometimes work against the GPs and cause burdensome operational and administrative challenges. On the other end of the spectrum, having too few LPs can lead to those investors potentially having unhealthy influence and authority within the fund.

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Opportunity Costs

When fundraising, it can be beneficial for new managers to set forth a clear plan of who they will target and understand the profile of investors they would like within the fund. For more information, refer to VC Lab’s ‘Ultimate Guide to Get LPs,’ which provides helpful suggestions for fundraising.

Too often, new fund managers focus on large institutional investors, which typically do not invest in new GPs or the relatively small funds they manage. At times, new fund managers also concentrate and spend time on investors who wish to invest relatively negligible amounts of capital which causes them to end up with an unnecessarily large LP base.

Combined, both can lead to an inefficient campaign and result in the fund failing to gain traction in its fundraising efforts. As capital allocators, fund managers can also garner an appreciation for the concept of ‘opportunity cost‘ in fundraising. Time spent on the discussed avenues of financing may lead to expending scarce resources and time in an un-optimal manner. Therefore, setting an appropriate ticket threshold can serve to benefit your time and help you focus on the right investors.

It can be provident for new fund managers to brush up on the decrees set forth by local regulators in their jurisdictions. This is because these institutions can often place limitations on the number of LPs funds can have without registering with authorities. Fund managers can strategize their fundraising efforts and develop a thought-out approach using this information. For example, some jurisdictions such as Luxembourg require extensive KYC and AML checks for LPs if they own more than 10% of the Limited Partnership. This can sometimes be a deal-breaker for some LPs as such processes require intrusive background and financial checks.

In the US, the Securities and Exchange Commission (SEC) requires VC funds that seek exemption from registration to follow specific guidelines, including avoiding general solicitation and the following portions within the Investment Company Act of 1940, which venture capital funds typically fall under. Consequently, having a large base of LPs may result in VC funds not gaining exemptions under the following sections in the US:

Section 3(c)(1) 

Fund managers that seek exemption from registration via section 3(c)(1) must ensure that the limited partnership consists of less than 100 limited partners for funds over $25m. Recently, the SEC changed regulations regarding the number of investors funds below $10m can have and increased the number to 250 limited partners. 

Under this exemption, limited partners must qualify as “accredited investors,” and fund managers must take reasonable steps to ascertain their accreditation status by conducting diligence on each investor. Accredited investor definitions vary with jurisdictions and local regulators; therefore, fund managers should check local decrees. In the US, the SEC, under Rule 501 of Section D, defines accredited investors as persons with a net worth of over $1m (excluding the value of the persons” primary residence) or have a gross income of $200k, or joint spousal gross income of $300k for at least two years in a row. More on accreditation requirements here.

Section 3(c)(7) 

To gain SEC registration exemption using Section 3(c)(7), funds must be comprised of “2,000 or fewerqualified purchasers, where each investor must own $5M or more in investments. Again, fund managers “must” take reasonable steps to ensure each investor’s status as a qualified purchaser.

Administrative Challenges

Taking into consideration the aforementioned regulations, fund managers who have an extensive LP base that exceeds the stated limits will be required to conduct individual diligence on the accreditation status of each investor. As you can imagine this can prove to be an operational challenge, especially when the focus of the fund manager is needed in other critical areas. Upon completing checks, fund managers will also require signatures from every investor to close the fund. Once again a broad LP base can cause friction for GP, who need to orchestrate an efficient process to co-ordinate with all of the LPs. 

Operational challenges

After closing, fund managers typically seek to keep investors informed by reporting the portfolio’s performance. Often they also have to manage individual queries regarding the fund and nurture long-term relationships with LPs by reporting on the performance of the investments.

Again, a more extensive LP base may mean that fund managers spend an un-optimal amount of time fulfilling their duties and accommodating LPs. There can be an opportunity cost in these scenarios as managers may not have enough time to evaluate startups, keep up to date with the ecosystem, and write checks on behalf of their investors. The bookkeeping tasks also increase with the LP base and should be taken into consideration by the GPs in the fund.

Summary

In the US, having a large base of LPs that exceeds SEC requirements can mean that such funds must register with the SEC. Typically, fund managers avoid registration as it can be a lengthy and complex endeavor. Additionally, fund managers must spend an exuberant amount of time navigating SEC regulations and conducting diligence on each investor with both of these registration exemptions. Consequently, fund managers should aim to have 20 – 30 LPs in their funds to run an efficient fundraising campaign.

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

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The Ultimate Guide to Get Limited Partners

Integral to the success of launching an enduring VC firm is the ability to fundraise from LPs effectively. At VC Lab, we’ve created a set of free resources for aspiring fund managers to use. These resources are designed to provide clear insights and help GPs source, reach out and pitch limited partners. This article encapsulates all of the information fund managers need to run an effective fundraising campaign and get to a quick first close.

Note: Each jurisdiction has its own rules regarding general solicitation, and fund managers should make efforts to understand them when communicating with potential LPs and fundraising. Refer to VC Lab’s ‘Tips to Avoid General Solicitation‘ for more information. 

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Planning to fundraise

Fundraising is the single most misunderstood thing in VC

Adeo Ressi

Adeo Ressi, CEO of VC Lab, suggests that fund managers may want to consolidate fundraising to as short a period as possible, ideally three months or less. In running a focused and efficient fundraising campaign, it can be important to lay out a plan prior to fundraising. To do this, you might want to identify all of the relevant target LPs and engage with connectors in your network to get warm introductions. Refer to VC Lab’s set of resources on ‘Leveraging your Network’ for more information.

This involves gaining a good understanding of the LP landscape. As explained in our guide on ‘The Best LPs for New VC Firms.’ large institutional investors may not always be the best source of capital for new firms, and fund managers can be better served focusing on HNWIs. In your planning, you can also start warehousing deals to bring into the fund in preparation to showcase LPs. Read VC Lab’s guide to ‘Warehousing Deals‘ for more information.’  

Setting a fund size

At times, new managers look to raise larger funds to incite change in their domains which can sometimes work against them as they’re considerably more challenging to close. When starting a new fund, even experienced GPs who have managed vast funds opt to start small since they can close quickly and scale their fund size in due time. 

Typically, fund managers must get from 10%-20% of the fund for a first close. As you might imagine, it can be much more challenging to close 20% of a $50M fund compared to a $10M fund. As Paul Bragiel, experienced fund manager and mentor at VC Lab says, it can be prudent to establish a ‘Minimum Viable Fund.’ Refer to VC Lab’s free resource on ‘Evaluating your Network’ to calculate your ideal fund size. 

Some LPs also do not look favorably at large audacious first fund sizes either. In an interview with VC Lab, when asked about an ‘LPs advice to VCs,’ Court Lorenzini, LP in over 15 funds, stated that it could be a point of concern to see new fund managers raise too large a first fund. 

1st close strategy 

Importantly, you may want to approach each of your closings with varying strategies. For your first close, it can be beneficial to target HNWIs who are more likely to invest. 

You can start with smaller check sizes in your first close while highlighting your track record of success to gain traction. This is because larger LPs often wait for the fund to operationalize before committing capital. Therefore, by raising a large fund focused on large institutional investors, you may find yourself in a conundrum. This strategy often does not yield a successful outcome as GPs cannot gain momentum in their fundraising efforts when speaking with LPs. Refer to VC Lab’s guide for more information on ‘How to Pitch LPs.’

You may want to take time to consider the minimum ticket size for your first close relative to the ideal number of LPs in your fund, which is ideally around 30 to 50. Below is a guideline for ticket sizes for each of your closes.

Min Ticket Threshold 1
Guidelines for minimum ticket sizes

Gaining traction 

Fundraising is a momentum game

Adeo Ressi

Often, successful fund managers leverage a first close to gain momentum for their 2nd and successive closes. This can be an essential concept in fundraising as it can contribute to helping new managers to get traction and efficiently close their first funds. 

Upon a first close, you can start operationalizing your fund and deploying capital to construct a portfolio. When doing so, it can be beneficial to invest in high-profile companies that can generate a quick markup in valuation, preferably in time for your second close. By displaying markups, you can demonstrate two things from the viewpoint of LPs. Firstly, you de-risk the fund as your LPs can take advantage of the markups. Secondly, you can exhibit your ability to get great deal flow and pick outstanding startups. To gain a more in-depth understanding of the viewpoint of LPs, refer to Adeo’s insightful conversation with Court Lorenzini on ‘The LP’s Perspective’.

As mentioned in your second close, you may want to adapt your fundraising strategy and shift your focus to more prominent investors, such as family offices. As shown in our minimum investment guidelines, you can increase your ticket thresholds with each consecutive close.

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

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Top 5 track records to launch a VC firm

VC Lab has helped launch over 100 VC firms on continents such as the Americas, Europe, Asia, Africa, and many more. We have worked with thousands of VC fund managers in this process and gained valuable insight into the past experiences and accomplishments that helps GPs launch enduring VC firms.

In our free accelerator program, we’ve seen fund managers leverage five critical areas of their track record to raise capital from limited partners. Through these, fund managers can create a unique thesis to capture value in the market and obtain the means to access great deal-flow and fundraise effectively.

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VC Lab’s insight

In our conversations with hundreds of aspiring fund managers, we’ve seen a multitude of GPs leverage their various sets of experiences and track records to raise from LPs. Refer to our data below to see the track records fund managers in VC Lab have leveraged and focused on in limited partner conversations.

1 2
Pie Chart showing the track records utilized in theses of fund managers in Cohorts 4 and 5 of the free venture accelerator.

Notably, those in the program often look to leverage their past experiences in angel investing and community leadership, forming over 50% of Cohort 4 & 5.

2 2
Pie Chart showing the track record utilized in the theses of VC Lab alumni who’ve successfully got to a first close.

The data of program graduates present intriguing insights, as seen above. It would appear that theses that leverage the fund manager’s track record on community leadership, advisor work, and angel investments seem to be beneficial in closing LPs and getting to a first close.

Leveraging your track record

You may be wondering how you can leverage your track record to raise funds from LPs. For a detailed guide to constructing a compelling venture capital thesis, refer to VC Lab’s guide “What is Your Venture Capital Investment Thesis.”

When looking to leverage your past achievements and track record, it can be beneficial to consider the LP’s point of view. The key can often be to look through the lens of how a particular experience or accomplishment can enable you to obtain excellent deal flow to activate your network in your fundraising process. Such factors often determine the success of a new fund manager and are criteria in LP’s decision-making.

Additionally, the theme of a compelling thesis can often be quality over quantity. When looking to leverage your track record, you may want to feature highly relevant information for LPs to focus on to deliver a succinct message. This theme applies to all backgrounds and track records and can be a common theme in all the track records outlined below.

Community leadership

Community leadership can be several related things in this context. For example, in VC Lab, we’ve seen fund managers who have organized and brought together a vast community of entrepreneurs, investors, and thought leaders in a particular domain. It can also mean having an extensive network of connections in your area of focus. 

A track record of community leadership can be compelling from the viewpoint of LPs and help you get to a first close. Having a quality network can often enable fund managers to obtain great deal flow and get allocations in competitive deals. It can also mean that you are an expert in a domain and can activate your network of connectors to fundraise effectively and add value to your portfolio companies. Read more on how to ‘activate your network and leverage connectors’.

Angel investments

As the data shows, a track record of successful angel investments can be effective in helping fund managers get to a first close. It can be essential to note that LPs often value the quality of your companies over the quantity of your portfolio. For example, suppose you have an outstanding company in your portfolio, such as Uber. In that case, it may be better to feature the company’s exceptional success instead of highlighting multiple investments that are all performing well.

Also, it may be best to feature angel investments related to your fund’s thesis. For example, if your fund is focused on B2B SaaS companies, highlighting your investments in consumer goods may not be entirely relevant from the viewpoint of the LPs. Therefore, it can be a good idea to include exits and markups in your area of focus. This can be helpful as it can signal your ability to invest and pick highly valued and well-performing companies, a skill that you can replicate as a professional investor and fund manager.

Advisor work

Advisors, in this context, are those who have helped companies scale and grow. When looking to leverage their track records, there are some potentially beneficial feats advisors can focus on to impress potential investors. For example, LPs are likely to place a higher emphasis on the caliber of companies you’ve advised and may want to understand how you drove results and markups with your actions and insights. 

If you have advised noteworthy companies with your expertise in growth and scaling, it can be helpful to quantify the results of your accomplishments. This can signal that you can replicate such feats again as a fund manager. You can highlight the network you have acquired in your advisory roles and your large sphere of influence in your domain.

Founder success

Interestingly, though success as a startup founder is a challenging and impressive feat to accomplish, preliminary data shown above suggests that it may not be the highest converting track record relative to some of the others. A simple explanation for this may be in the execution of demonstrating relevancy to the role of a fund manager to LPs. 

The challenge for founders may be to show their ability to investors. A good way to exhibit this might be to leverage and highlight your multiples, markups, and exists generated as a founder. This can be a good indicator of your ability to drive value in a company. It can also be a good way to present your domain expertise. 

Another value add you can show to your LPs is your great deal flow. For example, if you can demonstrate that other entrepreneurs require and value your expertise and often come to you for mentorship and guidance, you can signal to LPs that you have the right skill set to be a good fund manager and sought-after source deals.

Executive accomplishments

Those seeking to highlight their executive accomplishments may want to show their operations experience in their track record and thesis. As an executive, these can be accomplishments you drove and achievements that helped companies scale. When featuring such noteworthy feats, it may be a good idea to demonstrate how your achievements drove positive results and quantify your results. For example, perhaps you may have helped several startups land large customers which then enabled the companies to raise subsequent financings. Again, it may also be noteworthy to draw on your domain expertise and how you can leverage it to attain great deal flow.

The key theme in highlighting your track record can be your value add to founders, the network you’ve built, and your operational excellence. Operating as an executive in high-profile roles can often provide an arsenal and toolkit unbeknownst to new founders and can be an incredibly valuable asset for fund managers. You can leverage such experiences to help companies grow in your domain of expertise and may want to highlight it to potential investors in your 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

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2022 is the Year of Venture Capital

The VC asset class is showing relatively strong growth amidst market uncertainties around the world, seeing historic returns while demonstrating unprecedented levels of liquidity and growth. Fuelled by a maturing ecosystem, investor asset reallocation, and a renaissance of new expert fund managers, VC has recently been the top-performing asset class and is expected to continue its strong performance in the years to follow.

Venture outperforming

As shown by Pitchbook’s data below, venture capital has outperformed every other major asset class in the last three years and has demonstrated noteworthy growth in the previous decade.

In this time, venture capital and the startups it backs have proven to be a valuable asset with many success stories visibly changing the world we live in today. Most people can feel firsthand the net-positive effects of venture capital, whether it is the convenience offered by food delivery and taxi-hailing services or the notable strides taken in electric vehicles and alternative meats, all of which are venture-backed.

New venture liquidity

Importantly, not only is the asset class showing high returns for investors, but we are also seeing increasing liquidity with a thriving secondaries market, estimated to be around $70B in the US. Consequently, venture capital’s previously inherent long time horizon is slowly diminishing, further cementing its attractiveness to investors and institutions. Also contributing to the unprecedented levels of liquidity is the sharp rise in the VC-backed startup IPOs in recent years. As shown by the data below, IPOs within the United States reached record high numbers, with 407 companies going IPO in 2021 generating $615B, while global VC-backed IPOs reached $1.38T.

Interestingly, these figures have not reached such levels since ‘The Sarbanes-Oxley’ act of 2002, which “mandated strict reforms to existing securities regulations,” making it much more challenging for companies to list publically. Around the world, prominent backers of VC are also seeing a much quicker time to exit; notably, in Asia, some companies achieve unicorn status in as little as two years and can exit within eight

Re-allocating to venture

Amidst these changes, investors worldwide are focusing on venture capital, which has consistently been delivering high cash-generating businesses. With the most recent crash in cryptocurrencies wiping over $1T in market value, investors are growing weary and choosing to reallocate capital to more productive assets, such as venture capital. This is evident in the rise in VC funding worldwide, which rose to 2021 to $671B. As shown below, both VC deal count and financing have nearly doubled year-over-year in the US, with early-stage first-time financings also taking a notable uptick.

Considerable levels of VC investment in 2021 have seen many new entrants and investors looking to increase the allocation within their portfolios to the venture capital asset class. This shift is multifaceted as both highly sophisticated institutions such as endowments as well as High Net Worth Individuals are weighing up their exposure to the asset class and reallocating their capital to participate in the creation of global unicorns and attain a stake in these prized assets of the present and future.

Rise of venture-backed unicorns

A Cambrian explosion of startups is observed across the world as founders are evermore determined to incite positive change through the companies they build. Though there is no global census that counts startups, we are seeing exponential growth in the number of startups worldwide via the Founder Institute. Models looking to estimate the number of startups also lay credence to this, predicting exponential growth in the number of tech company formations.

In conjunction with the uptick in new company formations, the maturing VC ecosystem now provides more founders with the necessary financing, expertise, and resources required to scale their companies. Investments in growth stage venture capital also drive a large share of the ecosystem’s investment funds. With over 80% of capital going to deals valued at over $50m, capital allocators are betting big on venture-backed growth companies. Consequently, it is no surprise that more unicorns were minted in the US than any other previous year as shown below.

In conclusion…

2022 is the year of venture capital. All of the factors discussed above have culminated in the maturation of VC ecosystems in countries such as the US, leading to a prosperous asset class that continually produces highly valued, cash-generating companies. VC Lab is powering a renaissance of new fund managers across the globe by making the necessary information, expertise, and resources more widely available. The increasing rate of venture-backed unicorns worldwide is fuelling and nurturing new ecosystems, creating a cycle of innovation and growth.

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

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Meet the Funds from Cohort 5

Watch the full ‘Meet the Funds’ session below and read the key takeaways / learnings from the fund managers in Cohort 5.

VC Lab hosted a conversation about launching enduring venture capital firms with fund managers in Cohort 5 of the free venture accelerator. In this interactive session on the 13th of January, fund managers discussed their journeys to launching their VC firms and the fulfillment of inciting positive change at scale in their domains through their venture firms. The GPs also discussed their core driving theses and how VC Lab is helping to power the formation of their respective firms.

Panelists 

Key Takeaways

On launching a VC firm:

The panelists highlight their newfound international community at VC Lab. Launching a VC firm can initially be daunting; the Cohort 5 fund managers share the benefits of having a global set of peers to discuss their ventures, learn and share the journey with. 

They also share their experiences in working within a cohort structure and note the benefits of the peer support system when combined with expert guidance from the program. Important to note is the program carefully places firms in groups sorted by region and domain relevancy which can bolster fund formation efforts, especially in emerging markets and niche verticles.

On evaluating deal-flow:

Paolo emphasizes that deal-flow can be a part of your ‘secret sauce,’ which is a component of your thesis that highlights why you are the right person for launching your fund. Refer to VC Lab’s guide to learn ‘How to Determine Your Secret Sauce’ for more information. 

Some of our panelists such as Neeraj run accelerator programs based on their domain expertise. He explains that this helps them attract excellent deal flow in their region and enables them to evaluate the quality of deals. 

The GPs explain that to attract excellent deal flow, the fund managers may want to bring something of value to the table. They suggest that it does not necessarily have to be an MBA or vast sums of capital. For example, the panel agrees that you can invest your time with founders and look to leverage your network to add value too. 

On team-building:

Biola remarks on her journey to meeting her partner and suggests that teams in a VC fund work best when individuals’ skillsets and personalities complement each other. 

Additionally, the panel offers additional avenues and processes by which aspiring fund managers can meet like-minded individuals and potential partners. They suggest that those looking to launch a VC firm may want to be very active in their ecosystem by finding mentors, co-investing and attending demo days. They believe that by doing so you can gradually build your network in your ecosystem. 

Read more on building teams in venture capital. Refer to VC Lab’s guide on ‘How to Build a Venture Team’ for more information.

On going full time:

Venture capital is a long journey that requires a hefty commitment. Note that while the average marriage in the US lasts around eight years, most venture funds have a ten-year time horizon. Our panelists point out that when thinking about going full-time, new managers consider the long-term dedication the profession necessitates. 

They also highlight that potential LPs may have reservations about investing in new fund managers if they are not wholly committed to the firm. The panel points out that founders may also not look too keenly if fund managers are not allocating their entire schedule to the VC firm. They express that if this is the case when starting, you look to align your other activities with your fund thesis and make sure they are complementary to each other. 

On time commitments: 

Forming a fund takes a lot of time and mental fortitude; first, it may be best if you are prepared to commit the effort it takes to launch your fund. The VC Lab program assists general partners in securing capital commitments to complete a first close on a new venture capital fund, and as Nicolas points out, this initially requires at least 25 hours per week’s worth of work. 

Secondly, the panel suggests, with regard to your time commitments, it can be very beneficial to constantly strive to perfect your thesis and pitch, while taking in feedback from limited partners and the program. To do this well, our panelists think one has to be passionate about their cause and be prepared to commit help founders whenever they call. Furthermore, they state that having this passion is the foundation that can help you launch your fund and is something you can fall back on when you face obstacles. 

On the Mensarious Oath: 

The Mensarious Oath is an ethical code of conduct for venture capitalists and is pledged by all VC Lab attendees. Our panelist Silvia, an impact investor and vocal champion for women and Latino entrepreneurs, explains that she was drawn to VC Lab and the ‘Mensarious Oath’ due to an alignment in values. 

She also states that impact and return on investment are not necessarily mutually exclusive. Silvia highlights that her fund’s thesis is in line with the Mensarious Oath and she has always sought to activate her and other women’s capital to drive the change she wants to see in the world. She emphasizes that women investors are statistically twice as likely to invest in women entrepreneurs and outlines her desire to make positive changes by giving more women access to capital. 

On sourcing ethical capital: 

VC Lab is a vocal advocate for transparency within VC, as are the fund managers in our accelerator program. The panelists highlight the importance of value alignment when picking LPs for VC funds. They note that can be important to ensure that LPs uphold the values and mission of the firm and entrepreneurs they invest in. To lay the groundwork for a fruitful long-term relationship, fund managers and entrepreneurs may want to be ready to have conversations on the alignment of values with limited partners.

It can be beneficial for fund managers to appreciate the long-term nature of venture capital when launching their funds and partnering with LPs. Taking prudent steps to ensure capital from LPs is ‘ethical’ can help convey the values, mission, and brand of the VC firm in the long run. 

VC Lab runs accelerator, the four-month accelerator for venture capital firms and venture builders.

Cohort 7 starts in June and will help participants from around the world close on capital and start investing by October of 2022.

Learn more and apply here

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Top 3 Reasons to Start a VC Firm Now

Venture Capital is both the frontier of technological innovation and an instrument of positive change in the world. The asset class is seeing transformational shifts as a wave of mission-driven NextGen VCs are entering the domain to change the world for the better by launching enduring and ethical VC firms. VC has become a medium whereupon the best and brightest can incite and accelerate the progress we need globally, and now is a fantastic time to launch your dream VC firm. 

Close in 2022

Aspiring General Partners looking to launch their own Venture Capital Firms may want to consider starting in Q1 to maximize their chances of getting to a close in 2022.  

Closing a fund can be a challenging and long journey with unpredictable arcs and obstacles. VC Lab’s free 16-week accelerator program aims to get fund managers to a close in 6 months or less, while typically, funds can take over 12 months to get to a first close. 

Provident preparations now can enable fund managers to gain early traction in the year and give enough time for GPs to form teams, develop their theses, and begin building and activating their LP networks. This way, even if funds miss the closing window in May, they can bolster their chances of a successful first close in the fall of 2022

Booming Asset Class 

The venture capital asset is thriving, and the data shows strong liquidity, growth, and returns in venture capital across the globe. Aspiring fund managers may want to start their venture firms in the near future and enter the venture capital arena to take advantage of the Cambrian explosion of startups and the consequent surge in innovation across many verticles that is occurring globally.

In their deliberations, fund managers may want to factor in the current attractiveness of the asset class to investors and the increasing number of LPs entering the space to finance new GPs. As outlined in our article ‘Why Invest in Venture Capital?,’ avid and historic backers of the asset class such as Harvard and MIT’s Endowments have recorded 34% and 56% ROI respectively in the last year.

New entrant GPs / LPs are also seeing record levels of returns, with the data showing that venture capital has outperformed every other asset class in the last 3 years and has demonstrated excellent liquidity, leading more LPs to enter.

Become a Catalyst

Aspiring GPs with the vision to incite positive change in the world can now bask and revel in the opportunities that present themselves in VC. The state of near-perfect transfusion of capital, talent, technology, and transparency means that fund managers can become the catalyst to spark a new era of innovation by financing their domains of expertise and the entrepreneurs within them. 

Recently, due to the aforementioned levels of returns and high-profile VC-backed startup success stories, the asset class is beginning to lose its moniker as a risky and ‘alternative’ asset class and is garnering global attention. Simultaneously, transformational shifts are occurring with the ‘Rise of NextGen VCs’ and new LPs entering the space. The climate in VC is also nourishing talented founders and investors, with resources gradually becoming more broadly available, making this point in time a great time to launch a VC firm and accelerate the change the world needs.  

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Top 5 Tips to Launch a VC Firm in 2022

In this AMA, we meet the funds in Cohort 5 of VC Lab, who share their experiences in launching their dream VC firms with VC Lab. Our panelists give prudent advice to those looking to become GPs, and we also open up the floor to questions to get a better view into the minutia of venture firm building.

Watch the full interview with VC Lab Cohort 5 Fund Managers below.

The diverse panel of fund managers have domain expertise spanning from FemTech to Investment Banking as well as extensive regional experiences across Africa, Europe, the Americas, and Asia. All of our panelists are passionate about VC and are advocates in promoting their local ecosystem and particular sectors of focus.

The Panel:

Developing a winning thesis:

Developing a compelling thesis is important when launching a VC fund. In their theses, aspiring managers should think about how they can gain outscaled returns in this competitive environment and implement a unique strategy for their funds. VC Lab helps new fund managers develop their ‘secret sauce’ and thesis, which you can read more on here.

Influencing public policy as an avid backer of entrepreneurship and venture capital in Lagos,  Africa, Biola talks about the importance of partnering with founders and having a hands-on thesis to venture capital in emerging markets.

She explains a need to transfer knowledge and nurture entrepreneurship in the African ecosystem by giving founders the necessary expertise and capital. The way to do this is by a thesis of hands-on synergy. By doing so, new fund managers can help founders and prime the startups for success. This way they can also develop a reputation for adding value post-investment, which can later help in sourcing excellent deal flow.

Leveraging the past for future success: 

A part of your ‘secret sauce’ can be your past experiences and expertise. Being an expert in your fund’s domain is a very good indicator of your capabilities as a fund manager and something you should look to highlight to LPs.

Paolo discusses how his past experiences in financial services help him as a fund manager. He shares the benefits of having a multitude of experiences when it comes to investing in startups and how his background as a founder allows him to have a unique perspective and empathy

Paolo also dives deeper into the importance of leveraging said experiences when conducting diligence and adding value to portfolio companies post-investment. He also shares that this helps them have great deal-flow and spot investment opportunities where others cannot. 

The perfect first fund size: 

Neeraj points out that setting pragmatic and feasible goals for your fund size is a prudent course of action when strategizing your fundraising campaign. 

Our panelists note that when strategizing about their ideal fund size, VC Lab helped set realistic expectations and evaluate their network to calculate their optimal size. The panelists also believe that new fund managers should think about approaching their first fund as a proof of concept and not look to raise vast sums of capital. 

Use our free ‘Network Evaluation Template’ and refer to our in-depth guide to assess your network and calculate your optimal fund size. 

Finding gaps in the market:

When working on a fund thesis, managers should spend some time finding market opportunities in their domain of expertise. Market gaps are in abundance, and new managers should look to make a compelling case to LPs on how their fund’s focus can address them.

Nicolas explores underserved segments such as FemTech, which receives only 4% of all venture capital investments in the healthcare category. He highlights the disproportional amount of investment FemTech receives in the healthcare sector and shares his vision and the significance of having new venture capitalists operate in and build ecosystems in underserved markets

Looking for the perfect partner: 

Venture capital is a long journey, and most closed-end funds have a lifetime of around ten years, so finding the right partner is quite important for launching a VC firm.

Biola and Silvia both highlight the significance of finding alignment in values when looking for a partner, as it can often sustain relationships through the trials and tribulations of launching and operating a VC fund. 

When looking for a partner, clearly understanding your talents can help to find someone to complement your skillset and have a harmonious symbiotic relationship. An excellent way to find such individuals is to be active in an ecosystem where you are very passionate and add value to the ecosystem.

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 at GoVCLab.com.

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Tips to Avoid General Solicitation for VCs

One of the essential tools in the arsenal of aspiring fund managers looking to launch an enduring VC firm is networking. When launching a fund, it is vital to activate your network correctly. A common mistake made by new fund managers is ‘general solicitation,’ such as that described in Regulation D of the Securities Act of 1933 in the US. Regulations against general solicitation are prominent in most jurisdictions, and fund managers should seek to understand their local decrees. 

Fund managers can activate their networks without general solicitation and advertising in private offerings and attract Limited Partners to invest in their funds. This article can serve as a guide to help you avoid breaking regulations within your jurisdiction and run an efficient fundraising campaign. 

What is general solicitation?

The Securities Act of 1933 in the US requires all offerings or sales of securities to be registered with the SEC unless the issuer of the securities can claim an exemption from registration. US venture capital funds either rely on Rule 506(b) or Rule 506(c) under Regulation D as an exemption from registration.

Rule 506(b)

A fund relying on Rule 506(b) can sell its securities to accredited investors, as defined by Rule 501 of Regulation D. However, they cannot engage in general solicitation or general advertising of the fund offering. In practice, this means fund managers of 506(b) funds can only solicit investments from investors with whom they have a pre-existing relationship.

Rule 506(c)

Suppose a fund manager engages in activities deemed as general solicitation. In that case, the fund may rely on 506(c). However, the fund can consist of only accredited investors, and the issuer must take reasonable steps to verify the accreditation status of those solicited to invest in the fund. The SEC did not explicitly state what constitutes “reasonable steps” in Rule 506(c); however, the SEC subsequently published guidance on verification here.   

Regulation D does not define what constitutes general solicitation however, in Rule 502(c), the SEC did specify that general solicitation includes “any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio” or “any seminar or meeting whose attendees have been invited by general solicitation.” The SEC later expanded this definition to include activities undertaken on the internet. 

Summary:

Simply put, this means that publicly announcing your fundraising status while your fund offering is ongoing constitutes general solicitation, and you should take “reasonable steps” to verify your investors’ accredited investor status as per your local regulators guidance regarding general solicitation rules. This introduces an additional barrier when fundraising, and typically fund managers want to avoid obstacles that can hinder fundraising efforts.

How to avoid general solicitation?

Typically, you cannot make public references in most jurisdictions and solicit investments when fundraising. Posting statements such as “We are fundraising for fund” is a big red flag and should be avoided since it may be deemed as ‘general advertisement‘ by regulators such as the SEC. Therefore, try to be careful of your activities concerning your fundraising status on publicly available domains such as the web. This includes tweets, publications, and other forms of communication available to the general public. Though a fund adviser may use publications to discuss its advisory business, said publications should not mention the fund or indicate they are seeking investors for a fund.

It would be best to approach public forums such as conferences with a similar provident strategy. Fund managers should act with care to not offer or sell securities when appearing on a panel, presenting, or distributing printed material within events that the general public can access.

Guidelines

In instances where you have sensitive information regarding your fundraising campaign, for example, within your website, it is advised that you take measures to safeguard this information. This may be accomplished by password protecting such areas and meticulously controlling access to said information and data. Furthermore, fund managers should act with care when publicizing their theses and take necessary steps to ensure that publicly available statements cannot be construed as an advertisement.
Statements regarding your venture firm should avoid mentioning fund activities. For example, you may make remarks on what sectors and technologies you focus on and invest in without citing broader information about the fund’s activities.

How can I engage LPs? 

When engaging with LPs, you should aim for targeted communication with individuals in your personal network rather than general contact with the masses. It would be best if you refrained from openly discussing fundraising activities with individuals or groups with whom you have negligible prior relationships. An easy way to avoid this is to develop meaningful relationships with potential limited partners prior to soliciting investment for your funds. 

Instead of unsolicited emails to a large group of individuals, utilize other proven means to run a successful fundraising campaign. Targeted communications directed by a fund adviser to persons with a substantive pre-existing relationship will not be deemed as general solicitation or general advertisement. Fund managers may discuss a prospective investment in fund securities without violating Regulation 506(b). Refer to VC Lab’s “Utilizing Connectors” guide to master the art of getting warm introductions to limited partners without general solicitation.

This content is provided by VC Lab, the venture capital accelerator. 

The free 16 week VC Lab program provides guidance, structure and a network to complete a fund closing in 6 months or less. Since mid 2020, VC Lab has helped launch over 100 venture capital firms around the world.

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How to Find Limited Partners: Conducting ‘Cold Outreach’

New managers looking to raise funds from LPs face many challenges and obstacles. Even if one does have an extensive network within venture capital, fundraising can be difficult. Though leveraging your internal network is one of the primary means of fundraising, cold outreach campaigns can be a very successful supplementary tool to build your network if implemented in the proper manner. In fact, even seasoned fund managers take on the act of cold outreaching to build their networks with potential LPs on occasion. As this is a brilliant way of expanding your network within the venture industry, it is something new managers might care to master. This article will give you a comprehensive guide to finding LPs and conducting cold outreach.

When conducting cold outreach, it is important to follow the guidance regarding general solicitation. Note that the goal here is not to advertise your fund to the public / the masses, but rather develop means to build long-term relationships with potential LPs.

Find the Right LPS

To find the right LPs for your fund, it will be beneficial understand the profile of investors you would like within your fund. This can depend on several factors such as region, stage, and sector of focus, to name a few. Make sure that you focus on highly relevant individuals with the capacity to invest in your fund. In order to find the right LPs to focus on, we advise that you focus on the correct type of investor. We have outlined the most prominent investors in new fund managers in our article ‘The Best LPs for New VC Firms’. To summarize, as a new fund manager, focusing on High Net Worth Individuals (HNWI) as well as Family Offices can yield the best results, as both of these investors are typically the most likely to back you.

When creating the profile of investors you think are most likely to come into your closing, you can ask yourself some basic questions. For example, are they domain experts in your sector? Have they had any exposure to Venture Capital in the past? Are they sophisticated investors? Can they meet your minimum ticket size? Can they add value to the fund and your portfolio companies? When answering these questions, you will better understand your investors and, in turn, can be laser-focused only on relevant LPs. This research will also increase the odds of those individuals coming into the fund’s closing as you’ve taken the time to research their relevancy and can demonstrate it in your initial messaging.

Now that you know what your ideal investor looks like, you may be wondering how you will find them on the internet. LPs can be elusive, and as previously mentioned, often do not publicly advertise their investment status or strategies. Without a clear plan, you will quickly discover that finding LPs on the internet can be akin to looking for a needle in a haystack. Mastering Boolean operators can be crucial when combined with X-Ray search queries and save you hours of aimless browsing.

Emphasize your focus on HNWI and Family Offices, including exited founders, angel investors, and wealthy individuals in your sector of focus. Be sure to continually refine your search queries based on your conversations and levels of success. Perhaps your targeting should include / exclude specific keywords; be vigilant in regularly updating and improving your strategy while keeping a record of your outreach and meetings.

Google Search Example

Boolean search strings are logical statements used to find specific information in terms of search. Knowing how to utilize Google X-Ray search can be a potent tool for finding LPs. Google X-Ray search utilizes ‘Boolean statements’ to make this possible. For example, searching for the sentence “LPs in Venture Capital” can trigger many different variations and results which may not be relevant.

Boolean statements such as the ‘Site:‘ search term will enable you to search for results only from a specific website. With this, you can specifically search sites such as Twitter, LinkedIn, and more. Other functional terms such as (AND), (OR), and (-)(NOT) can be beneficial when combined with the ‘Site:‘ and ‘Location:‘ search terms. An example of a helpful search string when fundraising can be:

Site: linkedin.com (AND) Location: “United States” (AND) “Angel Investor” (OR) “Limited Partner” -“Consult*”

The query in this example will only return results from LinkedIn.com within the United States. Secondly, the results will feature the exact people with ‘Angel InvestororLimited Partner’ in their profiles. The () expression will exclude any results that start with the phrase “Consult” which looks to remove irrelevant words such as consultant, consulting …etc. from the query.

LinkedIn Search Example

Similarly, you can use the same Boolean Strings on LinkedIn to find people of interest. This is a great tool when looking for connectors to LPs and asking for introductions. For example, when searching on LinkedIn, you can filter the results to 1st and 2nd connections. Additionally, you can limit your search to a particular region or country by selecting the desired geography in the ‘locations’ selection box. You can then input a search query such as into LinkedIn search:

“Limited Partner” OR “LP” AND “Investor” AND “VC” -“Associate” -“Analyst” -“Principal” -“Advisor”

This particular search term looks for those with the phrases Limited Partner or LP, which also has the words Investor and VC within their profiles, while looking to exclude keywords such as Associate, Analyst, Principal, and Advisor.

It is advised that you create and refine your own queries to meet your fundraising needs. For example, if you are looking for investors and new connections in emerging markets, adding the keyword, “emerging” can be helpful. As previously mentioned, constantly updating your CRM system can be beneficial to keep track of your progress.

Planning

When planning to reach out to potential LPs, you can check to see if you have existing mutual connections with them. If you do, referring to our Utilizing Connectors” guide can be helpful in leveraging your existing relationships for ‘warm introductions.’

In the cases where you do not have any relationships to leverage, you may want to continue with planning a cold outreach campaign. To achieve the maximum engagement possible, look to strategize your messaging accordingly and consider the objective of each email and call to action. For example, what action are you looking to incite via your email? Typically, this can be to schedule a meeting or review your deck.

Messaging

It is extremely valuable and prudent to conduct a specific and personalized outreach campaign instead of the ‘spray and pray’ model, aiming for a generic message to a broader audience. When doing so also remember to not advertise your fund as this will be deemed as general solicitation. Instead, it would help if you opted to be like a sniper in fundraising for your new fund. This means that you look to pinpoint potential LPs that are most likely to invest in your fund and tailor your outreach to them in a personalized way to naturally build a rapport and relationship. The data suggests that “spammy” un-personalized messages do not elicit a response from investors.

Therefore, you can strive to make your messaging relevant to the person you reach out to. Remember, the more personalized your email, the higher the chance of a reply. However, this does not mean that you should spend a disproportionate period researching each potential LP. Have they recently invested in a similar fund, or are they an expert in your sector? Perhaps highlight a relevant achievement or experience or other reasons they might be interested in your fund.

In writing your message, keep it concise and to the point. VC Lab’s Accelerator Pre-Curriculum Thesis can be helpful to shorten your fund thesis to a digestible sentence, which is beneficial for a cold email or message. Try to share critical information about your fund and seek to find out if there is an alignment with the investor’s strategy. To run an efficient fundraising campaign, you can seek to ascertain if the LP’s investment strategy permits them to invest in your fund. Additionally, think about the subject line of your email, as this is a huge determining factor of LPs opening your email. If LPs do not open your email, they cannot read your message, so spend an appropriate amount of time on your subject line

This content is provided by VC Lab, the venture capital accelerator. 

The free 16 week VC Lab program provides guidance, structure and a network to complete a fund closing in 6 months or less. Since mid 2020, VC Lab has helped launch over 100 venture capital firms around the world.