Category: Accelerator Pre-Curriculum

In order to build a strong venture capital firm as a first-time fund manager, you need to start with a strong Investment Thesis.

What is the Investment Thesis for a venture capital firm?

An Investment Thesis is the strategy by which a venture capital fund makes money for the fund investors, called Limited Partners or LPs. It identifies the stage, geography and focus of investments, as well as the unique differentiation of the firm.

How do you write a compelling Investment Thesis?

There are multiple components to a compelling Investment Thesis that we have compiled into a simple to follow format. A good Thesis can often take months to develop, iterating on feedback from the market, advisors, and fund investors. In order to start this process, we have created a simple template for creating a venture capital Investment Thesis below.

“[Fund Name] is launching a [$x MM] [Stage] venture fund in [Country / City] to back [Geography] [Sector / Market Companies] [with Secret Sauce]”

Below you can see tips for each component in [brackets]:

• [Fund Name] When getting started, we recommend using a last name or color, like ‘Ressi Ventures’ or ‘Orange Fund,’ since the Thesis will evolve many times over the first months. After you feel that you have a final Thesis, then choose a name that represents your fund.
• [$x MM] This is the size of committed capital by LPs to the fund. You will be able to raise a fund that is 10 times the size of what you think you can easily close from contacts that you already have. So, if you think that you can easily raise $500,000 from friends, acquaintances and other contacts, then your first fund size maximum is $5 MM.
• [Stage] Stage is usually based on fund size, and, for New Managers, the options are angel (<$5 MM), pre-seed ($5 MM to $15 MM), seed ($15 MM to $50 MM) and Series A (>$50 MM). It is easier to have a larger fund doing an earlier stage, such as a $100 MM angel fund, than it is to have a smaller amount of money for a later stage, such as a $10 MM Series A fund.
• [Country / City] This is the city or country where the New Managers are living or plan to live while running the fund. Now, most funds have a life of at least 10 years, so make sure to pick a city or country where you and your fellow New Managers plan to be for some time. In addition, if you are living in a large country, then it is better to specify a city or region. “East Coast” is better than the United States.
• [Geography] This is the region where the fund will invest in portfolio companies. If the Geography is not specified, then it is assumed that the funding will be local. This is particularly important for New Managers, who often try to be too broad and then do not appear credible. For example, it is unrealistic to assume that a New Manager with a small fund will do cross border deals that require complex legal management. 
• [Sector / Market Companies] This is the type of companies that the fund will focus on investing in, such as FinTech, digital health, SaaS or marketplaces. Ideally, when choosing a sector or market in a geography, the opportunity will be obvious to the right LPs, such as “East Coast Fintech companies” or “German SaaS companies.” 
• [with Secret Sauce] ’Secret Sauce’ is your insight into a sector or market opportunity based on your in-depth experience. For example, “West Coast heath startups based on my 15 years leading the largest health tech angel group in San Diego while practicing neurosurgery.” The secret sauce needs to show why you are uniquely qualified to create this fund, and, if the market opportunity is not obvious, it should also show why the market opportunity is important right now.

What is a sample Investment Thesis?

Using the above template, here are some clear and concise thesis examples:

• “Purple Ventures is launching a $5 MM angel fund in Brussels to back European government technology startups that leverage the partner’s experience in various political and bureaucratic leadership roles across the EU.”
• “Found Capital is a $15 MM Seed fund in Lagos to back African mobile payment and fintech companies sourced from the partners network built while working as startup ambassadors at Google, PayPal and Microsoft in Africa.”
• “Sven Fund is a $100 MM Series A fund in Singapore to back blockchain startups in Asia that are building dynamic supply chain systems, which is a market segment where the partner had the largest recent exit in the region.”

How specific should your Investment Thesis be?

A compelling Investment Thesis is very specific about stage, geography and focus to align with the allocation requirements of Limited Partners. A common problem is that New Managers are often afraid to be specific, since they feel it will limit their ability to do hot deals. A Thesis states the intention of a firm to pursue certain kinds of investments, but often is not legally binding in the firm or in the fund agreements. So, an Investment Thesis has the effect of gravity. Venture capitalists often can do deals that are far away from the Thesis, but they have less attraction.

How do you refine your Investment Thesis?

You will be refining your Thesis heavily for the first few months when forming your fund. The measure of a great thesis is how easily it can attract meetings with LPs, but the first person that you need to satisfy with your thesis is yourself.

Here is an initial exercise to get started that should take about 30 minutes to an hour.

1. First, use the template above and try to write three versions of a potential venture fund thesis. As mentioned above, be as concise and specific as possible.
2. Next, read each of them aloud while recording a video of yourself. Speak conversationally (in the same way you might casually pitch the idea to someone in an elevator), and in one video “take”. 
3. Then, watch the videos and ask yourself if you would realistically invest in that thesis. How clear was the message? How confident was the delivery? What questions come to mind?
4. Finally, revise the thesis and video until you are satisfied with your work. Resist the urge to make the one-sentence thesis a one-page thesis. Remember: brevity is the key. 

Download this VC Investment Thesis Worksheet

What are the next steps?

This is just one part of the first steps to starting a venture capital firm, which include: 

1. What is your Venture Capital Investment Thesis
2. How to Determine Your Venture Capital Fund Size
3. How to Select a Venture Capital Firm Focus
4. How to Determine your Venture Capital Secret Sauce

In addition to your Investment Thesis, most of the decisions you will make as a new venture fund manager are directly related to the size of your fund.

Why is fund size important?

Fund size influences the stage of investment, the accounting requirements, the number of deals that are invested in, the amount that you can invest in every deal, the follow on strategy and many other variables. Most importantly, fund size determines the budget to pay the managers, who are called General Partners or GPs, and the team. 

Smaller funds of less than $20 MM normally have a part-time team in developed countries. As an example, for a $10 MM fund, you can expect approximately $200,000 per year to cover all of the expenses of running the fund, assuming a standard 2% Management Fee. In most developed countries, this is not enough money to cover operating costs, deal-related closing costs, and the full-time salary of more than one GP in the fund. 

What are common venture fund sizes?

Venture capital firms are generally grouped in ranges of fund sizes that are tied to investment stage. For this analysis, we are going to focus on what are called early-stage funds, which are Series A or earlier. Firms with larger fund sizes can focus on earlier stage deals, though a smaller fund generally can not do later stage deals.

To get an idea of how the size of a VC fund will impact the types of startups supported, the experience needed, and the budget requirements for venture capital funds, see the example chart below:

How do you determine what is the optimal fund size?

As a rule of thumb for a New Manager, the upper limit of your fund size is 10 times the amount of what you think you can easily raise from contacts that you already have. When you think about the size of your fund in this manner, you can also see how adding GPs with fundraising contacts can be a good strategy to grow the fund size. Just keep in mind that, in developed countries, full-time GPs normally require between $20 MM and $40 MM per head in fund size to cover salaries, expenses and other expenses.

How much do the general partners have to invest in a venture capital fund?

For funds over $10 MM and sometimes with smaller funds, Limited Partners will require that the General Partners invest at least 1% of the total fund size. The investment can be contributed over the through the same Capital Calls that other LPs are making. 

As an example, with a $10 MM fund, the GPs may be asked to invest $100,000. If there are two GPs, then each GP will be asked to invest $50,000. The fund may do five Capital Calls over five years, so each GP would need to contribute $10,000 per year in this hypothetical scenario.

What are exercises to determine an ideal fund size?

Here is a structured approach to consider your ideal fund size:

1. Quantify Your Network

1. First, identify all of your friends and acquaintances that have money to invest, and place them in a spreadsheet like the Network Investment Spreadsheet shown above. 
2. Next, besides each person, make a guess as to the amount of money that the individual might contribute as well as the likelihood of them investing in your new fund, and try to be very realistic. 
3. Finally, sum up the amounts and discount by the likelihood, as demonstrated in the Network Investment Spreadsheet, to determine your Fund Potential Size.

2. Analyze the Initial Size of Your Venture Fund

1. First, take the Fund Potential Size you calculated above, and place it into one of the buckets from the Fund Sizing Chart. For example, if your Fund Potential Size is $20 MM, then you can realistically do a Seed, Pre-seed or Angel stage fund. Ask yourself – is your “bucket” the type of fund, and organization, that you want to run? 
2. Next, consider what you might do to raise a larger fund size, which could include things like (1) increasing the size of your network or (2) adding another General Partner to the team, and analyze if this is something that you want to do by reviewing the pros and cons for each method of increase. 
3. Finally, select an Initial Fund Size that fits your goals, and that you believe you can realistically accomplish.

3. Validate Your Initial Fund Size

1. First, consider if you and your team have the financial capacity to invest 1% or more of the Initial Fund Size, and adjust the fund size accordingly. Keep in mind that you will likely NOT need to commit this money to start the fund, or all at once. Most fund commitments are funded over a period of time, so the General Partners can invest into the fund at the same rate as the other LPs, which are done through Capital Calls on a semi-annual basis, either as needed or on a schedule.
2. Next, evaluate if you have the time to raise a fund without income coming in, and adjust the fund size accordingly. For reference, raising a fund will take 18 to 24 months and will require at least 20 hours per week of your time for a fund of less than $15 MM, and at least 40 hours per week of your time for a larger fund. 
3. Then, evaluate if you want to make the long-term commitment to a fund given the Team Size and income opportunities, and adjust the fund size accordingly. For reference, most funds will operate for at least 10 years and often get extended to 12 or 15 years. 
4. Lastly, given all of the evaluation, select a Final Fund Size that is right for you.

What happens after you determine your fund size?

This is just one part of the first steps to starting a venture capital firm, which include: 

1. What is your Venture Capital Investment Thesis
2. How to Determine Your Venture Capital Fund Size
3. How to Select a Venture Capital Firm Focus
4. How to Determine your Venture Capital Secret Sauce

In addition to creating your Investment Thesis and venture capital fund size, one of the most important and difficult things for a new venture firm manager to do is to select the focus of the fund.

What is the focus of a venture capital fund?

A venture capital fund will normally focus on three areas: a specific (1) stage, (2) geography, and (3) industry or market.

For example, “seed-stage SaaS startups in Vietnam.”

For most venture capital funds, very clearly defining at least two out of the three areas above is important. However, for new venture capital fund managers, the fund focus typically starts a bit more vague in order to provide maximum flexibility in securing initial capital and doing deals. 

Why is it important to be specific with the focus of a fund?

The focus of a fund is the centerpiece of your Investment Thesis, which you will use extensively to attract like-minded Limited Partners. Without a clear focus, a venture capital firm is essentially asking Limited Partners to invest in the idea that the General Partner (or Partners) will make money on a blind pool of random deals, which is a big leap of faith with a new and unproven VC firm. 

With a focus, Limited Partners are instead investing in the General Partner’s ability to execute on a clear strategy to generate returns by investing in specific types of companies.

A good focus also provides the ability for the General Partners to use analysis and data to justify projected returns. For example, using the aforementioned “seed-stage SaaS startups in Vietnam” example, you should be able to find data supporting the growth and potential for returns in this area, such as “according to Cambridge Associates, seed stage investing has generated the highest returns in venture capital in the last decade, and SaaS startups in Vietnam have had four of the five largest exits in the last five years.”

In reality, most Limited Partners have specific investment criteria, and you will go through an iterative process to create a defined focus that aligns with this investment criteria. This process typically takes several months. 

Is it common for a venture capital fund to change the focus?

The focus of a new VC firm normally changes significantly in the first few months as the General Partner or Partners pitch the fund to various Limited Partners and implement market feedback.

Each of the three areas of focus typically change in different ways. 

1. The Stage (and Fund Size) Focus will change often, as the General Partner or Partners gauge demand from friendly Limited Partners, and then set reaslitic parameters for the fund. 
2. The Geography Focus of a fund is established early in the fund formation process, so it usually does not change much. 
3. The Industry or Market Focus is often fine-tuned throughout the pitching process, as market circumstances may change or different Limited Partners commit money to invest in specific industries or markets.

Do venture capital funds invest in deals that are not in their focus?

Venture capital funds often invest in deals that are not in their focus, but, commonly, these deals are related or close to their focus. For example, it common for Seed Funds to do a Series A deal, but you will rarely see them doing a Series B deal.

In the case where a fund wants to invest in a deal that is completely unrelated to their focus, they will normally set up a special purpose vehicle (“SPV”), and then ask any Limited Partners that are interested in the opportunity to invest directly through the SPV.

Can a fund focus on multiple stages?

The majority of funds focus on one single stage, but many funds will focus on two adjacent stages because it gives them to opportunity to “double down” on their most promising investments.

Outside of this scenario, however, it is rare to see a multi-stage fund, since the return profiles, deal types and support structures vary widely by stage. In addition, most Limited Partners invest by stage, so a multi-stage fund often makes the fund less compelling to most Limited Partners (especially when considering a new fund manager).

Does a fund need to focus on one geography?

There are many strategic reasons to set your fund focus on a specific geography, including access to dealflow, understanding of value-add, familiarity with legal compliances, alignment with Limited Partner criteria, and more.

The majority of funds focus on a limited geography or region, but it is common for venture capital firms to occasionally make strategic investments outside of their geographic focus. 

Should a fund have a broad set of industries or markets to focus on?

Most funds choose a wide set of industries or markets to focus on, since investment trends will change over time. However, it is very common to see small to medium-sized funds with a laser focus on a specific sector such as gaming or crypto, due to their obvious synergies with Limited Partner interests.

What are some best practices for setting a fund focus?

To analyze and determine your fund focus, we recommend you follow this structured process: 

1. Examine Your Dealflow

First, create a Deal List of the 10 most important deals that you have done or that you have access to right now, and write a sentence about what excites you about that deal. This would include things like the industry or market, the geography of the company headquarters, the stage, etc.

1. Next, extrapolate an Initial Target Focus from your Deal List , selecting the specific market or industry, geography, and stage that you have greatest access to. Write a couple of sentences about what excites you for these areas of focus.
2. Lastly, ensure that your Initial Fund Size (created using this Venture Fund Size Guide) is in alignment with the size needed to do deals at the target stage in your Initial Target Focus, and then evaluate pursuing earlier stage deals to see if that still excites you about the opportunity.

2. Assess Your Value Add

1. First, use companies from your Deal List to create a Target Deal List of at least five investments that meet your Initial Target Focus.
2. Next, for each company on the list, write a sentence about one way that you can help them now, one way that you can help them in the future, and one way that you can help the company to exit.
3. Lastly, write a couple of sentences that summarizes your Value Add to the Target Deal List, and assess if the level and nature of your Value Add feels correct for the stage you have selected. If not, see how you can adjust the Target Focus to increase your Value Add.

3. Review Alternative Sources of Capital

1. First, create a comprehensive Funding List of other venture capital funds or sources of money for companies in your Target Focus, as well as the stage immediately before and after your Target Focus. In other words, if your target stage is Series A, then you should look for sources of capital in the Seed, Series A, and Series B stages. 
2. Next, rank order the Funding List by whether you can partner or otherwise collaborate with every entity on your Funding List as a coinvestor, placing strictly competitive sources of capital at the bottom of the list.
3. Then, write a sentence about the relationship that you have or want to form with the top funds on the Funding List.
4. Finally, examine your Value Add and the potential relationships with the Funding List to see if your Target focus will be seen as valuable to your Target Deal List. If there is too much competition, you can revisit and adjust your Target Focus accordingly.

4. Iterate with “Friendlies”

1. First, identify anyone that you know well that might be an investor in your proposed fund, which are called Friendlies, and rank order them by how close you are to them.
2. Next, reach out to the top three Friendlies on your list and ask to speak with them for 30 minutes over the next few days about a new project that you are considering.
3. Then, during the call with each Friendly, tell them that you are examining a new project, describe your Target Focus, and ask them for brutally honest feedback without asking for investment.
4. Lastly, summarize all of the negative feedback from Friendlies in a paragraph and assess how to adjust your Target Focus based on the negative feedback.

5. Refine Your Investment Thesis

1. First, use this venture capital thesis template to refine your overall Investment Thesis with the Target Focus, trying to fit everything into an easy to digest sentence.
2. Next, share the Investment Thesis through email with at least five people, including a loved one and the Friendlies, and solicit quick feedback, asking, “how can I improve this?”
3. Then, collect and incorporate the feedback into your Investment Thesis.
4. Lastly, create an online folder in a system like Google Drive or Dropbox to store the various work that you have done so far.

What are the remaining steps in starting a VC firm?

This is just one part of the first steps to starting a venture capital firm, which include: 

1. What is your Venture Capital Investment Thesis
2. How to Determine Your Venture Capital Fund Size
3. How to Select a Venture Capital Firm Focus
4. How to Determine your Venture Capital Secret Sauce

Once you have figured out the fund size and the focus of your venture capital firm, the only thing remaining to finalize your investment thesis is to identify your unique value proposition. 

Or, as we like to call it at Founder Institute, the “Secret Sauce”. 

What is Secret Sauce for a venture capital fund?

Whereas an Investment Thesis identifies the stage, geography and focus of of a fund, the Secret Sauce describes why you are uniquely qualified to make money pursuing this particular thesis. 

In other words, it is the unique differentiator (or differentiators) that ultimately de-risks the prospect of investing in your fund for Limited Partners.

What are the components of a great secret sauce?

In order to sufficiently de-risk yourself in the eyes of LPs, your secret sauce will need to demonstrate the ability to do at least one of the following:

1. Find and close unique dealflow for your fund.
2. Add operational value to your startup investments.
3. Secure positive liquidity events for your portfolio. 

Usually, this relates to your past experience, or through unique strategic connections you have related to the focus of the fund.

In addition, while it’s always a good idea to be concise, your secret sauce requires specific details like company names, exit amounts, and other relevant details. So, for example, “based on the experience of the partners working in senior business development positions at Google and Microsoft” is a much better Secret Sauce than “based on the experience of the team.”

How do you know if you have a good Secret Sauce?

The measure of a good set of differentiators is how obvious it is to others that the firm will make money.

For example, here is a good Secret Sauce: 

“after being a prolific angel in the sector over the last 10 years and securing 23x cash on cash returns.”

This short phrase demonstrates a few important things. First, it shows that the venture capitalist knows how to source deals and make investments. Most importantly, the venture capitalist has had success investing in the past, so it is likely that the venture capitalist will succeed in the future.

How can you determine your fund’s Secret Sauce?

We recommend you follow these steps:

1. Identify your Initial Unique Differentiator

1. First, think through which of the following Unique Differentiators best describes your strengths:

1. I can get the best deal because I have _____(select one below)_____.
   • A large number of strategic contacts
   • Extensive industry experience
   • Proven track record of funding the best companies
   • A well established brand/following in the market
2. I help grow my portfolio companies by _____(select one below)_____.
   • Advising the CEO on strategy
   • Making productive sales and customer referrals
   • Growing the team with top candidate introductions
   • Helping to close subsequent financing rounds
3. I have contributed to various company exits by _____(select one below)_____.
   • Helping the CEO to prepare the business for an exit
   • Identifying ideal exit scenarios for a business
   • Counseling leadership through an exit process
   • Extracting maximum value for all parties in an exit

2. Next, rank your top three Unique Differentiators, and write a sentence or two about how your experience and/ or strategic relationships can support each. 
3. Then, test the top three Unique Differentiators with Friendlies (anyone that you know well that might be an investor in your proposed fund). Determine which one makes them most confident in your ability to generate positive returns for Limited Partners.
4. Finally, select the one Unique Differentiator that (1) was considered most compelling by the Friendlies, and (2) you are most comfortable devoting a long period of time towards executing. 

2. Refine your Unique Differentiator  

1. First, take the one Unique Differentiator and draft three versions with different wording that captures the same sentiment and meaning.
2. Next, record yourself on video reading the different wordings, and watch the recording to see which feels most natural for you to say (and hear). 
3. Lastly, integrate the most natural wording of your Unique Differentiator into the Secret Sauce component of your Investment Thesis.

Finalize your Investment Thesis

If you have been following this series and completing our recommended first steps to starting a venture capital firm, you have just completed the final step in the Investment Thesis process. 

You should now have determined your (1) Initial Thesis, (2) Fund Size, (3) Fund Focus, and (4) Secret Sauce above.

Now, let’s put all the components together:

1. First, draft your whole Investment Thesis in the following format: “[Fund Name] is launching a [$x MM] [Stage] venture fund in [Country / City] to back [Geography] [Sector / Market Companies] [with Secret Sauce]”.
2. Next, ask yourself honestly if you will invest in that thesis personally, keeping in mind that external Limited Partners will require you to contribute 1% or more of the capital required for the fund size.
3. Finally, we are here to help! Apply to the free VC Lab accelerator for individual help by going here.

What are the next steps?

If you followed the exercises above, then you now have a good foundation from which to build a VC Firm. 

Just keep in mind that this is an iterative process, and first-time fund managers should be very receptive and malleable to feedback they receive from the market, advisors, and fund investors.

We strongly recommend you continue getting feedback from your Friendlies, and consider publishing the thesis on a blog or social media account. The more feedback, the better. 

The total process to form your venture capital Thesis include:

1. What is you Venture Capital Investment Thesis
2. How to Determine Your Venture Capital Fund Size
3. How to Select a Venture Capital Firm Focus
4. How to Determine your Venture Capital Secret Sauce