Complete Guide to Starting Your Venture Capital Fund
Introduction
What if launching a VC fund cost $100K instead of $500K+ and required just $10K minimum LP commitments? This isn’t hypothetical; it’s the new reality reshaping venture capital.
VC fund formation establishes the legal investment vehicle that allows venture capitalists to pool capital from limited partners and deploy it into startups. This process involves critical decisions around fund structure, legal domicile, timing, and regulatory compliance that impact every aspect of operations.
Traditional fund formation costs of $500K+ create barriers for emerging managers. Innovative alternatives like Start Funds now offer $100K minimum closes and $10K LP commitments, fundamentally changing access. Through programs like VC Lab, which has launched 600+ VC firms with 65% operating outside the US and 29% featuring female GPs, this democratization continues accelerating.…
Category: Venture Capital Fund Formation
Download Cornerstone v3
The Cornerstone LPA, the easy-to-use limited partner agreement for venture capital funds, has been upgraded to Version 3.
Version 3 of the Cornerstone LPA incorporates the latest SEC regulation changes and supports both American and European waterfall structures. The upgrades reflect extensive feedback, enhancing the core agreement to meet evolving industry standards. It is recommended that everyone upgrade.
Having gained widespread acclaim and adoption, the Cornerstone LPA is fast becoming the standard agreement for emerging fund managers and has been reviewed by leading fund formation attorneys and endorsed by numerous limited partners.
As regulatory and market circumstances change, the Cornerstone is continuously updated to reflect best practices for managers and limited partners alike.
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Cornerstone Improvements
The Cornerstone LPA has been updated to include options for distribution methods, compliance with the latest SEC regulations, and other changes required by managers.…
Venture capital firms function as boutique investment firms with a focus on early-stage investments. Every role within these small businesses has its specific responsibilities, ranging from sourcing investments to fundraising.
While traditional roles in venture capital have been stereotyped, contemporary programs like VC Lab are redefining these perceptions. They’re breaking the mold, reshaping roles, and driving evolution within the venture capital industry.
Managing Partner
The Managing Partner sits at the helm of the venture capital firm. They lead the strategic vision and overall operations of the company. They play a pivotal role in shaping the investment portfolio and fundraising for the firm.
Traditionally, Managing Partners direct the long-term strategy of the firm and oversee multiple funds with different investment strategies. They interact with Limited Partners and make final investment decisions, sharing the same responsibilities as Partners.…
Here is everything you need to know about picking a domicile for your VC fund. At VC Lab we’ve helped many ambitious fund managers such as yourself pick and launch their VC funds and we’ve simplified the process so you can focus on what matters most.
Domiciling is a complex and opaque process because of the many factors one has to consider. Each fund manager has a unique set of needs to consider with regards to their funds. You must take into account: your fund size, geography, thesis, LPs, and much more.
Read more in our ‘Best VC Domiciles‘ article.
The 7 key factors:
Fund Vehicles
Taxation / Cost
Speed to market
LP / Investor preferences
Sophistication of the national regulator
Legal system and certainty
Ease of doing business
Sign up to our Decile Launch, to automate your fund structuring.…
In order to build a strong venture capital fund, you start with a strong fund Thesis.
What is the fund Thesis?
A fund 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.
A fund Thesis is not for public consumption. It is private for Limited Partners only.
How do you write a compelling fund Thesis?
There are multiple components to a compelling fund Thesis that we have compiled into a simple to follow format. The ideal Thesis should not be longer than 40 words, preferably 35 to 37 words.
“[Fund Name] is launching a [$x MM] [Stage] venture fund in [Country / City] to back [Geography] [Sector / Market Companies] [with Secret Sauce]”
What are the key components of a fund Thesis?…
A vintage year is the year in which a firm forms and closes a venture capital fund. There are periods of time when many great companies are born, such as 2008 when Square, Stripe, CreditKarma, NerdWallet, Uber, Airbnb, WhatsApp and Instagram were all started, among others. This made 2009 a great vintage year for venture capital, despite massive global economic challenges with the collapse of Lehman Brothers.
Vintage Year Importance
The vintage year is often the single most vital factor affecting the success rate of a venture capital fund. As an example, a favorable vintage year can yield up to a 5x return for a top performing fund, whereas an unfavorable one might deliver only a 2x return.
Several factors affect the quality of a vintage year, determining whether it is favorable or unfavorable for venture capital firms:
Economic Fluctuations: The state of the economy, including downturns and booms, can significantly influence the success of venture firms.…
The VC Model Thesis is a succinct, one-sentence statement that articulates the guiding strategy for a VC fund. This Thesis, often the cornerstone of any successful fund, effectively communicates the fund’s unique value proposition, its targeted investment sectors, and the unique approach or Secret Sauce that sets it apart from competitors.
VC Lab has developed the VC Model Thesis and a Thesis Evaluator on Chat GPT version 4.0 to score initial Thesis work on a 1 to 5 rating system. The following article will help you to draft a strong Thesis, evaluate it using Chat GPT, and, ideally, get a score of a 4 or 5, guiding you towards crafting a world-class venture capital fund.
Understanding the Thesis Format
The first step towards building a superior fund Thesis is understanding the VC Model Thesis.…
Management fees are a critical aspect of venture capital (VC) firms, ensuring a regular income for the firm, separate from the investment’s performance. These fees are typically a percentage of the fund’s total capital and provide a steady revenue stream. In this article, we will explore how new VC managers earn through these management fees, using a hypothetical scenario where a new manager oversees three successive funds: Fund I of $5 million, Fund II of $20 million, and Fund III of $50 million.
Venture capital management traditionally begins with smaller funds, which are simpler to raise and deploy. For many new venture capital managers, starting with a smaller fund serves as a proving ground, enabling them to demonstrate their investment acumen and operational capabilities without the pressure of a substantial fund.…
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.…
Decile Launch provides fund formation and fund admin to top performing venture capital firms. The offering starts with a two-month structured program to establish the venture capital firm and close the fund. Then, the newly launched fund becomes a member of Decile Partners for fund accounting, deal reviews, real-time reporting, and strategic advisory support. The Decile Launch and Decile Partners offerings are all offered at a fixed price with no hidden fees.
Decile Launch simplifies the complex process of venture capital fund management, saving fund managers time and money, while allowing them to concentrate on what they do best – identifying, funding, and supporting high-potential investments.
Decile Launch Offering
Decile Launch and Decile Partners provide an all-inclusive and turnkey support from formation to operations.…
In the world of venture capital, the phrase “past performance is no guarantee of future results” does not hold true. When it comes to raising funds for a new venture capital (VC) firm, a manager’s track record can be a significant determining factor for investor interest. This article outlines the critical elements of a manager’s track record and explores why it is essential for starting a venture capital firm.
The Importance of Track Record
A venture capital firm is essentially an investment vehicle. At the helm of this vehicle is the fund manager, whose decisions about which startups to invest in largely determine the success or failure of the venture. Therefore, when limited partners (LPs) are deciding whether to invest in a venture capital firm, one of the most critical factors they consider is the manager’s track record.…
A capital call is a request made by a venture capital fund to its investors to contribute capital to the fund. This is typically done when the fund needs additional funds to make investments or to cover its ongoing expenses. Capital Calls are commonly paid by the Limited Partners as defined by the Limited Partner Agreement (LPA).
Capital Calls are a crucial aspect of venture capital investing, as it enables the fund to make new investments that generate returns for its investors. However, it can also be a source of risk, as investors must be prepared to provide the capital requested, even if they may not have anticipated the need for additional contributions.
This comprehensive guide provides an in-depth overview of capital call processes, management, strategies, risks, and best practices.…
Venture capital fund closures are a seasonal phenomenon, influenced by factors such as holidays, budget allocation schedules, tax seasons, and the geographic locations of limited partners (LPs). Recognizing and understanding these patterns is crucial for both fund managers and their LPs to optimize their planning. In this article, we’ll delve into the best times to close a VC fund, the importance of planning, and how to prepare for the fund closure process.
Seasonality of Fund Closures
Seasonal patterns significantly venture fund closing timelines. December and January, alongside July and August, are widely regarded as the “funding doldrums” periods. Securing LP funding during these months can be particularly challenging due to holiday celebrations and vacation schedules. Additionally, local and religious holidays may contribute to further funding slowdowns.…
In venture capital fundraising, understanding the distinction between soft circled and hard circled limited partners is crucial. Soft circled partners express interest in investing, while hard circled partners commit to a specific investment amount. This article will outline how to identify soft and hard circled limited partners, guide you through the identification process, discuss the importance of regular communication, and explore the role of geography in closing probabilities to help you maximize your fundraising success.
What is Soft and Hard Circled
Soft Circled Limited Partners:
Soft circled limited partners express interest in investing a specific amount or range, but they typically have additional questions or require further steps to finalize the investment. The probability of closing a deal with a soft circled commitment ranges from 10% to 25%.…
A venture studio, also known as a venture builder, startup studio or startup factory, is an organization that systematically generates, develops, and scales multiple startup companies. Unlike traditional venture capital or incubator models, venture studios are actively involved in the operational aspects of the business. They provide not only capital but also shared resources, expertise, and a network to help startups grow and succeed.
How are venture studios structured?
Venture studios create distinct legal entities for the parent company and the portfolio companies. It is common for venture studios to have an attached venture fund to finance portfolio companies after launch. When there is a fund, the recommended structure is to have a dedicated management company above the venture studio entity and above the GP and LP entities of the fund (see diagram).…
Fund Expenses refer to the costs associated with operating a venture capital fund. They traditionally include expenses to complete investments by the fund, such as legal costs, and other ongoing operational expenses of the fund, such as an annual audit. Fund Expenses are commonly paid by the Limited Partners as defined by the Limited Partners Agreement (LPA).
Venture capitalists typically work to reduce Fund Expenses. Managers have discretion to pay for expenses out of pocket, and certain expenses can be unclear if they are Fund Expenses, such as paying for a general CRM system or attending a conference.
This article outlines some best practices for handling Fund Expenses by emerging managers.
What are Fund Expenses?
“Fund Expenses” is a commonly defined term in a Limited Partner Agreement to refer to any expenses incurred to set up and operate a fund, including Management Fees, taxes and accounting.…
Starting a venture capital fund can be complicated without the proper guidance or tools. Below are the most important steps an aspiring general partner should take to launch and close an enduring VC fund.
1 > Draft a Compelling Thesis
Developing a winning Thesis is important to attract Limited Partners (LP’s). The Thesis provides important information that a LP needs to know, such as fund size, stage, geography, and focus areas. In addition, a strong Thesis highlights how the fund manager or managers are uniquely qualified to launch a venture capital fund in a specific sector and geography by showcasing the relevant track record.
2 > Create a Strong Track Record
LP’s look for domain expertise and a strong track record as part of their process to evaluate investing in a fund.…
Even quantitatively-minded first-time GPs can find modeling a challenge because venture capital models are often quite different from the models you may be familiar with. There are also some similarities and basic differences that we can leverage to get a running start.
Build Overall Forecast
Start with a simple budget including total capital, expenses, investments, proceeds and distributions. At the same time, factor in assumptions for management fees and carry that most closely relate to your situation. Once you have this framework in place, you can apply an assumption of gross return multiple on your invested capital to estimate returns.
Building this model may seem simplistic, but it’s essential for closing your first round of capital. Not only does it give you a basic understanding of your business and the size of investments you can make from your fund, but a well-designed forecast shows prospective LPs that you know what you’re doing.…
Cornerstone by VC Lab is a lightweight and easy-to-use Limited Partnership Agreement (LPA) designed to simplify investing in the venture capital asset class by reducing the use of high-priced fund formation attorneys. Venture capitalists starting a new fund can customize and negotiate investment terms without engaging a law firm.
The Cornerstone Agreement is short, easy to read and easy to customize. The economic terms of the fund are clearly laid out in the beginning of the Cornerstone Agreement, and General Partners can customize certain terms to fit their fund’s needs. On a high level the process is as follows:
A General Partner takes the Cornerstone Agreement and customizes plug variables in the Key Economic Terms for a new fund offering.The General Partner shares the customized Cornerstone Agreement with potential Limited Partners for feedback on the terms.Once…
In addition to your fund Thesis, most of the decisions you will make as a new venture fund manager are directly affected by the size of your fund.
Fund size influences investment strategy, team size, and overall impact. There are very different decision criteria between new managers (Fund I) and emerging managers (Fund II or Fund II) when deciding a fund size. Emerging managers can do their next fund at 2x to 5x the size of their previous fund, depending on performance.
This article focuses on fund size criteria for new managers.
What are limitations faced by new managers?
New managers on Fund I have practical limits on investor access. Large institutional investors often bypass Fund I due to additional risk and an unproven track record, leaving new managers to rely on smaller investors.…