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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

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How to Find Limited Partners: Utilizing Connectors

A connector is a person who can give you warm introductions to relevant potential investors in your fund. Typically, connectors have existing relationships with wealthy individuals, and as such, they can introduce many potential investors to you. Warm introductions usually have a higher success rate, therefore utilizing connectors can be a very powerful tool. These connectors can be exited Founders, Venture Partners, other General Partners, Limited Partners, and general High Net Worth Individuals (HNWIs). By utilizing connectors, you can leverage more nodes in the network and drastically increase your exposure to potential investors, consequently further boosting your chances of closing your first fund successfully.  

Types of Connectors

Founders

Successful and exited startup Founders can be a good resource for new fund managers, as such Founders’ opinions are incredibly valuable to LPsSpeaking with VC LabCourt LorenziniLP in over 15 VC firms and Co-Founder of DocuSign, shares that he often speaks with Founders of warehoused deals to aid his decision-making. During his deliberation process to finance a new fund manager, much like many LPs, he too looks to ascertain why Founders chose to work with you over other VCs. Consequently, getting references and introductions from Founders who have had significant markups can go a long way to impressing any potential LPs. Many LPs in Venture Capital firms are also direct investors in startups.

It is highly advantageous to have a list of such Founders to call upon since most exited Founders are wealthy and more comfortable with the asset class than most; therefore, they may be willing to invest in your fund themselves. More often than not, successful Founders may also have great relationships and a direct line of communication with HNWIs and Family Offices and can potentially connect you to others who might be interested in becoming an LP in your fund. 

If you do not have a vast network, providing value to Founders is a great long-term strategy to build these relationships. Note that this can take quite some time, though it is advisable to start developing your network as soon as possible. You can add value to a startup in equal parts, both as an investor and an advisor to the company. Such acts will enable you to build a deep-rooted network within VC and can expedite fundraising in the future.

Other VCs

Other General Partners and Venture Capitalists can also prove to be a great source and means of meeting new Limited Partners. Once again, it would be best if you looked to leverage your network and get introduced to Limited Partners. For example, if you attend VC Lab, you can discuss the matter with your cohort peers and work towards a mutually beneficial outcome. One way you can do this is to be open with your LPs and give introductions to other General Partners. When making introductions and asking for them, make sure that all parties have opted into the introduction and you follow the expected etiquette. It’s often best to practice making this as less transactional as possible and optimizing to provide value to all parties involved

Venture Partners

A Venture Partner is a well-networked strategic partner that typically does not reside within the Venture Capital firm. As such, they are a valuable resource for NextGen VCs in multiple functions, one being fundraising. These terms are outlined in the Venture Partner Agreement and can be modified to suit both parties. You can adjust levels of commitment from the Venture Partner and agree upon fair compensation and commission for the results they produce via carry in the fund

Therefore, as a new manager of a Venture Capital firm, it can be highly beneficial to make tactical alliances with Venture Partners. LPs too can look positively to such individuals who can share their expertise with the firm and both source deals as well as help you fundraise. Venture Partners are increasingly becoming the new source of labor in Venture Capital and are proving to be extremely valuable to NextGen VCs and are something you can consider utilizing.

Approach 

When looking for potential LPs, you can refer to our ‘Conducting Cold Outreach guide to help you find them on the internet. Specifically, you can utilize LinkedIn and search for relevant 2nd-degree connections in your desired region. When searching for limited partners, you can adopt a sound CRM system to track your process and leads. This CRM system can be a spreadsheet or specifically tailored softwareNote your relevant existing connections to the potential LPs you want to engage with during the process. For example, if an ex-colleague is a mutual connection, you can make a note of that in your CRM to the particular LP, as you will reach out to your references in the near future for an introduction. 

Before reaching out to your connections for introductions, you can research why each LP is relevant to your fund. Look for pertinent qualifiers that make them suitable. For example, if they have previously invested in fund managers with a similar focus / sector or in the pre-seed to seed stage. This research will make your ask more compelling as you can demonstrate your knowledge in your messaging to your connection. By such a demonstration, you give connectors confidence that you too may be a person of interest to the investor and worthy of connecting.

Messaging

Nathan Beckord, CEO, and Founder of Foundersuite, recommends that when messaging your connections, you place emphasis and on your messaging, both in the question you ask and the knowledge you demonstrate. The typical “Is there anyone I should speak with?” question does not elicit a response from connectors. If you do not know what you are looking for, neither will others. Instead, Nathan recommends you utilize your research on LPs and demonstrate your knowledge of them in your outreach to connectors. The goal here is to invoke a positive response by having a clear ‘ask’ and establishing the investor’s pertinence

For example, you may ask for an introduction to a list of 4 potential investors from one particular connector. It will help if you explain why each specific investor is relevant to your fund in your messaging to the connector.

As an example, in your outreach, you can mention:

John Doe – has previously invested in a pre-seed stage VC firm in our area of focus

Joe Bloggs – states in his profile that he is looking to invest in new fund managers

Jess Schmoe – has spoken about our area of focus extensively and has relevant experience

Jane Smith – is a co-investor in one of our warehoused deals

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.