Discussion

Fundraising for emerging managers is almost always necessarily a slog. Rumor has it that one notable fund that claimed to be oversubscribed had over 700 meetings with potential LPs. Michael Staton of Learn Capital reports that his CRM illustrates he had over 300 conversations, and sent over 1,000 emails in a fundraising process that took around two years. This section will try to shed light on best practices to help emerging managers get through the process with less friction.

Team building, composition, and dynamics is paramount in VC. Though there’s been a decade long trend towards VCs that are former founders and entrepreneurs, there’s debate about whether or not the best VCs are even capable of being operators. Data from Endeavor suggests top-tier VC firms are largely composed of partners with operating experience.^[1] Yet, Mike Mortiz, Jim Breyer, Bill Gurley, Peter Fenton, and Fred Wilson were never founders or operators.^[2]

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Team stability is often cited as hugely important to LPs. Even entrepreneurs are getting wise, with an advice piece in TechCrunch stating “beware the VC that has had any general partners leave the firm.”^[3]

Differentiating among other managers is bound to get more improbable. In the chart below, Samir Kaji tracks the rise of Micro-VCs, and by the end of 2016 he said there were 340 established Micro-VC firms with more than 300 additional firms in market for their first funds.^[4]
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Chris Douvos explains that he will not engage with GPs that try to push for short time frames. Instead, he prefers building solid relationships over time. “I’m always a fan of those managers that invest in getting to know their potential investors outside of the rushed formality of the fundraising process.”^[5]

Some LPs are good at bringing in other capital. GreenSpring associates helped bring in stable, institutional partners to a high performing venture fund who wanted to rotate out a tired LP base.

Questions Chris asks:
“What’s the best piece of personal or professional feedback or criticism you’ve ever gotten from your partners and how have you put the lessons learned into practice?”
“What’s the biggest debate that simmers without end at your firm?”

Foundations

Before the fundraise, partners are fundraising in a period known as “pre-marketing.” The line between raising and pre-marketing is fuzzy, but generally demarcated by the presence of all of the legal documents that will structure the fund, the verbal commitment of anchor limited partners, and the firm’s confidence in being able to raise a good portion of the capital at an imminent close date. Semil Shah said he wished he had “pre-marketed” for six months rather than two.^[6]

Materials

LPs expect to do their due diligence on potential fund managers, just as VCs performance due diligence on prospective companies. The following list outlines the standard materials needed to begin the fundraising process with LPs. The more organized and prepared we can be as fund managers increases our chances of positive outcomes on the fundraising trail.

• A shareable introductory slide deck meant to email out, lacking any proprietary information that the raising firm wouldn’t want to be widely shared.

• A longer presentation deck meant to go through in person at an hour-long meeting. This deck should likely be visual and short on text explanations.

• A detailed slide deck meant for limited partners who express interest in continuing to evaluate making a commitment.

• A data room that contains:

  • References

  • Manager biographies and curriculum vitae

  • Detailed track record, preferably in raw data form

  • Examples of actionable, target investments that fit investment thesis

  • List of co-investor relationships, and/or deal flow sourcing network

  • A Private Placement Memorandum if you created one

  • Previous Investor Reporting

  • Press mentions

  • Notable thought leadership (articles, blog posts or essays)

  • Official fund documents (Limited Partner Agreement, Subscription Agreement)

Tips and Tricks

• “Fundraising is like cooking: the best meals are primarily based on ingredients. 90% of fundraising success is based on the fundamentals of the firm. Tricks and gimmicks can only provide 10% of the value, or even less.” (Shuang Zhang)

• Spend time with the market ecosystem, get to know the problem space and customer needs directly. (Astarte Ventures)

• Become known and visible in your own ecosystem by advising and adding value to entrepreneurs. (ArkFund, Learn)

• Build on a foundation of diverse founding partners, and highlight the power of the network and experience of these diverse partners. (NXTP Labs)

• Be very picky about the partnership. Professional LPs scrutinize teams heavily. (Sozo Ventures)

• Build a track record by running syndicates, and look into leveraging AngelList or other syndicate platforms. (Walk)

• Be willing to court HNWI and Family Offices deal syndicate by deal syndicate. (ArkFund, KEF Holdings)

• Put your own money, and maybe friends and family money, into a “Nucleus Fund” to build a track record and prove your assumptions. (Astarte Medical Partners, Cervin Ventures, NS Ventures, ArkFund, KEF Holdings)

• Be willing to be early in your focus and thesis. It takes five years (or more) of slogging it out until a market hits an inflection point and starts to take off. If you jump in then, you won’t have the reputation to participate in the best deals, and you’re probably too late anyway. (Golden Gate Ventures, Learn Capital, Astarte Medical Partners)

• Market yourself as a strategy and insight partner to potential LPs that have an imperative to be working in your markets, particularly for corporate, strategic LPs (Shuang Zhang, Learn Capital, Eli Lilly, Sozo Ventures)

• Invite LPs to well-produced events with a critical mass of entrepreneurs and energy. (Golden Gate Ventures)

• Develop a contrarian financial strategy and position it as a differentiator from the “herd” of other venture funds. (Cervin)

• Wait for the right anchor LP who can add credibility and make more passive LPs comfortable with their diligence and decisioning. (Learn)

• In addition to the Limited Partner Advisory Council, develop advisory committees or involvement levels based on meeting target allocation sizes. (Learn)

• Define your brand around a concept and positioning that is easy to understand. It doesn’t have to be vertically focused, it can be about stage, company building process, operations support.

  • “We are the best venture partners in your journey from $0-$10M in revenues.” (Cervin Ventures)

• If there’s a focus of the fund, build your firm brand to the point where investing in the fund is equivalent to investing in the focus. (NS Ventures, Golden Gate Ventures, Learn Capital, Astarte Medical Partners)

• If you’ve had one or more prior funds, highlight the discipline with which you stuck to your investment strategy and criteria. Be sure to explain and defend any fund strategic drift. (Cervin Ventures).

• If you’re talking about yourself, that conversation won’t go anywhere. You have to understand the identity, goals, intentions and interests of the investor and align. (Shuang Zhang)

  • Family Offices want to develop a relationship (KEF Investments)

• Investment strategies are often abstract. Show case studies, demonstration projects, and concrete examples that make your strategy and work real. Pictures and videos are worth a thousand words. (Shuang Zhang, Learn Capital)

• LP Perspective (Northern Trust):

  • Don’t...

    • Don’t use a placement agent -- it outsources (and de-values) the very relationship LPs are looking to build with GPs

    • Don’t do PPMs -- they are a waste of time and money

    • Don’t ask about process -- LPs are slow (expect discussion ~1year)

  • “LPs know what they are looking for...they just haven’t found it yet.”

Tools of the Trade

• Bison – Intelligence on the PE / VC market, synthesizing unstructured regulatory and news data into actionable information. Particularly helpful for data on:

  • Fund performance (70% market coverage)

  • Fundraising (covers 5000+ firm profiles)

  • LP insights

• Pitchbook – Database for PE/VC and M&A deals, with detailed company profiles. Particularly helpful for:

  • Sourcing investments

  • Due diligence

  • Market news and analysis

• Preqin – PE/ VC database, and reports and publications. Particularly helpful for:

  • Return data

  • Industry / Sector reports and publications

  • Active LP profiles

• Intralinks – Virtual dataroom service to allow collaboration across interested parties. Particularly helpful for:

  • Sharing materials with LPs during due diligence

  • Building data rooms with pipeline companies

• Box – File sharing, storage and collaboration tool. Particularly helpful for:

  • Well-integrated with other apps such as G Suite, Salesforce, Office etc.

  • Industry customized solutions

Worthwhile Events

• Partner Connect

• Trusted Insights: 150LPs and 30GPs, Trang Nguyen <trang@thetrustedinsight.com>

• SuperReturn and SuperInvestor

• Impact Capitalism Summit

• Raise

Case Studies

Lessons from NS Ventures

• Find a great sponsor who will also provide mentorship and guidance.LPs are looking for trust. Sponsors or partners can help get them there. NS Ventures created the relationship with NorthStar from the beginning. “If I didn't have them I would've made a lot more mistakes.”

• Be active and have a track record as an angel investor. Hian and Shane from NSI Ventures had 18 deals. In addition, it helped with dealflow: Hian and Shane had been attending conferences and actively participating in the ecosystem by writing checks among other things. As a result, by the time they set up the fund they had very good deal flow.

• Make a serious GP commitment. Of the initial U$30M, U$10M was the GP’s own capital. “Showing that you're putting your money where your mouth is really works.”

• Warehouse past deals with the GP’s capital prior to forming the fund. “We had four deals we warehoused we could discuss with LPs.”

• Put your angel investments into the fund at no cost.

• Have someone with a serious reputation on your investment committee or advisory board.

• Deploy the first money fast, get into exciting companies. “That was the advice we got from NorthStar. Soon after, we developed relationships with growth investors that could also be LPs. By the time we hit U$30M in commitments, we had $25M deployed.”

• Raise at cost after you have money deployed and companies are seeing markups. NS Ventures went out to raise after Sequoia had marked up one of their companies, which put the entire fund at 3x as they were raising. Their initial LPs had an agreement that they could close for 12 months at no cost, but they also had a preference to increase their commitments. When LPs heard they could put in money and instantly see a 3x markup, they almost couldn’t refuse. It also created word-of-mouth interest from institutional LPs that would be hard to get in front of.

• Once the fundraising process starts getting momentum, reject non-institutional investors. “You want to be able to turn them away if they didn’t commit earlier.” Non-institutionals, however, can play an important role in getting momentum going in the first place.

• Intentionally be small. NS stopped at $90 to be symbolically under $100M.

Case Study on Ecosystem Creation: ArkFund on Ecosystem Building

Noticing how hard it was to be a tech entrepreneur in Mexico City, Luis Barrios decided to help build the support ecosystem that empowers entrepreneurs, starting with a coworking space.

After graduating from Babson, Luis Barrios had a startup idea and went out into the world to make it happen in his hometown of Mexico City. After a burst of energy, he reflected that Mexico City lacked the supportive ecosystem of a Silicon Valley or Boston -- there were no mentors, angel investors, or VC funds that were identifiable and accessible to entrepreneurs. Additionally, Mexico City is home to prestigious universities which produce over 130,000 engineering graduates each year, however the city has struggled with convincing their developers from seeking opportunities in other countries and has faced difficulty in attracting investors to the region despite a promising startup dynamic (International Business Times). This has led to the path of entrepreneurship being discredited as a promising lifestyle or career choice by young professionals. Observing this, Barrios decided to commit to the larger systemic problem by building a coworking space -- The Pool, launched in 2013 -- rather than his own company.

The coworking space became a hub of entrepreneurial activity and entrepreneurship development through talks, classes, and mentorship. Seeing that many were working on promising startups but still had trouble raising their first round of capital, Barrios set out to address the lack of pre-seed capital. In 2014, he enrolled in the first class of VCx, a training program and community for family offices interested in angel investing, and was the first family office from Mexico to participate.

VCx, and later the Kauffman Fellowship, enabled Barrios to bring Silicon Valley best practices to his home country of Mexico, and help disseminate these to family offices in promoting angel and venture investing as a viable option. Barrios collected his network of family offices and next-generation principals, and started involving them in activities at The Pool, and began deal-by-deal to syndicate deals to these potential investors. At first, families were slow to trust that high-risk, early-stage deals were a viable investment option. Over time, the families and their principals, particularly the next generation principals, started seeing potential in the startups and became hooked on syndicates within networks of families they know and trust. It’s a way to keep these large family offices in a routine of investing in Mexico’s budding startup ecosystem, and Barrios now counts he has worked with over 40 families in Mexico to help them start angel investing. Building on this momentum, he closed his first fund in 2016, a nucleus fund, under the brand ArkFund.

When reflecting on this multi-year endeavor, Barrios explains that it’s potentially counter-productive to raise a fund and deploy it into an ecosystem that doesn’t have mature support networks. At the age of 35, he feels he has the time to take the long view and help build the ecosystem himself -- which sets the stage for one of the most thoughtful, well executed fund management strategies in Latin America.

Highlights

Highlighting Astarte Ventures on Learning the Market Ecosystem First-Hand

Astarte Ventures spent three years getting to know all of the different components and agents in today’s complex healthcare system. Co-founder Tammi Jantzen recounts visiting hospitals, meeting one-on-one with hospital administrators, surgeons, physicians, specialists, nurses, and caretakers. They paid attention to their pain points, needs, workflows, inefficiencies, and opportunities for new products and services. They also spent time learning what kind of breakthroughs and innovations Principal Investigators at research hospitals were pursuing, as a way to understand where the industry is going in the long term. By listening to people, they ended up forging strong trusting relationships with experts that can help evaluate new services, diligence deals, and sometimes even serve as potential initial customers to companies backed by Astarte. They can also act as a reference network for entrepreneurs who may have access to other high-profile or trendy investors, helping them win access to competitive deals.

Highlighting NXTP Labs on Diversity and Network

When founding NXTP Labs, Francisco Coronel developed a team of three co-founders who involved in the fundraising process. When discussing opportunities for potential investors, NXTP Labs’ approach was to highlight the diversity of their team and how that diversity has created an expansive network for leverage. The team’s diversity has also contributed to their brand recognition in the entrepreneur community, as well as with individual investors and large corporations.

At NXTP Labs, they have determined that hosting social events has allowed them to differentiate themselves and highlight their team’s participation in many different activities in the ecosystem. Their fund is based on crowdfunding from entrepreneurs in the community who devote a small monetary investment and commit hours to mentoring the portfolio companies. This has allowed NXTP Labs to create an alignment of interests between the LPs and the invested company, and also leverages the relevant knowledge of the LPs.

Highlighting Learn Capital on Presentation Design

Presentations these days are not just presentations. Presentations get sent out ahead of meetings to get your foot in the door. They are walked through over the phone, on web meetings, and in conference rooms. They get sent around. They are used as follow ups. They sit in data rooms. Odds are that your presentations have a larger impact on your brand identity than many other things you spend time and resources on.

Learn Capital believes in beautiful presentations. The good news is that there are a few key understandings of graphic design and tool use that can make your presentations better.

Think in Grids:

Once you see design in grids, you can’t unsee it. And it opens up a whole new world of design choices. Flip through some books on grids, the most popular being Making and Breaking the Grid: A Graphic Design Layout Book, an example of a grid from that book is in the image below:
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Manage Colors:

While Color Theory is fun, various tools do all the work for you. There are various color palette managers, and most office productivity apps you use, like Keynote, have easy ways to manage color if you know how to use them. Below, the Mac desktop app Spectrum shows recent color palettes. It’s easy to save these in formats that can be imported into other applications.

Here, a color palette has been imported into Keynote. Import your own through the settings icon next to the palette scroll selector.
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Manage Fonts:

If you don’t use a font manager, get started. Macs come with a good font manager, called Font Book.
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Most all presentations, or brand identity, for that matter, use two or three fonts and no more. It’s common to find only one font used, even including the logo.

Just like colors, most office applications come with their own font managers, and it’s helpful to understand how to import and manage fonts within the application.

It doesn’t sound challenging to stick to two or three fonts, but if a team starts working on slides they may forget that default fonts are often not the fonts of the brand. Something starts to look strange and unprofessional, but those that haven’t spent time in design may not notice the little observation: “you’re using Arial not Helvetica.”

Use Grids, Colors, and Fonts to Manage Templates:

The combination of grids, colors, and fonts compose the basic tools of building a template. A template is saved metadata that defines grids, colors, and fonts of master slides.
Templates give strong starting points and guidance based on the content of the slide. This guidance becomes key when working across teams.

Cleaning Up Images:

Many points are made with illustrative imagery. However, simply downloading or clipping images and adding them to the presentation often makes the presentation look sloppy.