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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. 

Table of Contents

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 Genesis, 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