Raising a Venture Fund

Almost every week lately I hear from teams thinking of raising a new venture fund. While that newfound ardor speaks volumes in itself, it is remarkable how people who think themselves adept at figuring out whether a potential portfolio company is worth funding are often so adrift when it comes to the “fundability” of their proposed venture fund. People babble away about relationships,willingness to hop on airplanes, and aggression, without once ever putting themselves in the position of institutional fund managers and asking, “Would I fund these would-be VCs?”
So, what does it take to get a first-time venture funded loaded up with capital? Some combination of the following:

  1. Proprietary deal flow
  2. A (good) investment track record, including at least two exits, ideally an M&A and an IPO
  3. Previous successful deals on which you pulled the string
  4. Namebrand CEOs & entrepreneurs who will vouch for your added value and usefulness
  5. Relationships with capital providers
  6. Presence & personality
  7. A differentiated background
  8. Board experience
  9. Proposed venture investment market sector(s) in which people are interested
  10. Other name VCs who have nice things to say about you
  11. A team of similar people

You don’t have to have all of these, but you better have most, and you better be high in at least a couple. What’s more, notice how relationships with professional service providers like lawyers and such don’t really matter that much, so don’t go telling potential investors how all the lawyers in town steer startups your way. Notice also how being deep in technology is good, but it is low on the list of things that will get capital providers jazzed.

Finally, people need a reminder on what constitutes “proprietary deal flow”. It is not that your Stanford friends will come to you first. There aren’t that many of them, and most MBAs are, de facto, not entrepreneurs anyway (why would they waste two years in school?). Nor is it that you know some serial entrepreneurs who have promised you their next deal. You need more than that, whether reputationally-driven or relationship driven, so that you’re not just another venture wannabe confusing aggression with what it takes to create a first-quartile IRR in an illiquid and unusual market.

So, how many teams like that have I heard from lately? The honest truth: Out of perhaps fifteen teams that I’ve spoken with since last August I’d say one cleared the fundability hurdle. Just one — and that’s a story for another day.


  1. Dan Primack says:

    Interesting post Paul, although I think you may be giving LPs a bit too much credit for intelligent selectivity (particularly when it comes to VC fund offerings). The “fundability” bar seems awfully low right now…

  2. When I used to do fund of fund investing, we looked at 3 things
    1) Organizational stability
    2) Track record
    3) Competitive advantage, usually through proprietary deal flow, or value add as vouched for by CEOs of succesful portfolio company exits.
    The #1 reason funds fail is due to a lack of organizational stability. Venture funds are remarkably unstable given the small size of the staff and the large size of the egos. Also, issues of sharing the carried interest when every GP has up and down cycles is challenging. Also, if the fund’s returns deteriorate and people leave, the LPs are left holding the bag on how to harvest the portfolio. Successful harvesting of a mediocre fund can be the difference between returning your capital or losing it.
    One other issue is the one of size. Too small means you have to get lots of individuals, too large and you may have to change strategy or funding stages. One last point — rarely does a firm have truly proprietary deal flow.

  3. Hey Dan —
    Well, I think rhe better fund-of-funds guys are selective when it comes to first-time venture groups. Despite all the talk to the contrary, some very well-known first-time teams did not have an easy time out there doing their raises recently.
    Does that mean that some quack teams won’t get funded? Nope. Some quack teams will get funded.
    Anyway, I’m mostly amused that venture guys don’t turn the same analytical lens on themselves as they do on portfolio companies. If they saw some startup with no team (i.e, a bunch of first-timers), no IP (i.e., no truly proprietary deal flow), and no track record, would they invest? Me-thinks not.

  4. i would think that the most credible way to promise a reliable flow of proprietary deals would derive from running an in-house fund for a popular platform (e.g., google, amazon)
    more support, then, for the thesis that platform funds will pressure the historic vc model
    or so it seems…