I had the opportunity to speak with an aspiring venture capitalist today. He wanted to speak with me for general advice about how to start his own venture capital fund. I enjoy these calls because I like helping people and I’m able to establish a new relationship in the process.
In my career I’ve had the opportunity to raise a fund and work behind the scenes to get it off the ground and operating. It’s not an easy process and it is not for the faint of heart. When he asked me for my advice, I suggested he think of the fund in the same way he would any other business. I told him there are three core area within a VC firm that are needed:
- Sales & Marketing
I’ll briefly break these down below.
Sales & Marketing – If you’re a new firm, you have to sell like crazy to raise capital. When you’re an established firm with a track record, your brand sells itself (e.g. Sequoia). New firms don’t have a brand yet, so they have to sell. No matter what stage of the firm, there is some level of marketing happening. For a brand new firm, the marketing responsibility falls to the General Partner (GP), and for an established firm that responsibility usually falls the investor relations person (or team). In addition to raising capital, new managers also have to sell and market themselves to attract entrepreneurs and build relationships with other venture capitalists.
Operations – It’s best to think of fund operations as the systems and processes running behind the scenes to ensure the fund runs smoothly. Operations usually consists of accounting, legal, and other administrative tasks. New fund managers with little fee income will (and should) outsource these functions. Established managers usually do all of this in house with their own staff.
Research – I consider the research function as the heartbeat of a firm’s sourcing and selection strategy. Sourcing & selecting new investments opportunities is a function of a firm’s investment thesis (i.e. what type of the companies/industries the firm is looking for) and the strength of the firm’s investor and entrepreneur network. For 99.9% of venture capitalists, this is the most fun part of the job and is usually how they feel they can best differentiate themselves and demonstrate their value-add to investors.
Now, to be fair, I am grossly oversimplifying this process because as I stated previously, operating a successful fund (in any asset class) is not easy. There’s a lot that goes into it. So much so, that I could easily write an entire blog post on any of the three categories alone. But, in an effort to be concise, I’ll just say that for anyone thinking about starting your own fund, I highly recommend talking to as many people within the industry as you can for advice, direction and how to avoid common pitfalls. I’d also encourage you to be patient. Raising your first fund can take 12-24 months (sometimes longer), so pace yourself, stay motivated, and don’t be discouraged when you’re told no. It’s a journey – enjoy it.