How to raise Fund I in 2024
Some distilled insights on funnel, messaging, tactics, and discipline for aspiring VCs, from Mark Suster and Samir Kaji
Back in August,
hosted Mark Suster on Samir’s Venture Unlocked podcast to talk about fundraising from LPs in the current (not great) market. It’s worth listening to the full hour-long episode, but a lot of the content focuses on managers raising Fund IV and V from institutionals and other large LPs. Here are 5 insights from the episode that are relevant for managers raising Fund I or II:Emerging managers who are raising Fund I/II should focus their fundraising funnel on RIAs (professional money managers for high-net-worth individuals) and professionally-managed family offices (~4:30): Institutionals (like pension funds, endowments, and foundations) write big checks and won’t generally invest before Fund IV. They’re also currently over-indexed on venture, both because venture investments were marked up so much during 2021 (the “numerator effect”) and because the other public and private markets have relatively underperformed or corrected more quickly (the “denominator effect”). High-net-worth individuals (whose money is often managed by RIAs) and family offices, on the other hand, write small checks and have historically been excluded from venture as an asset class, so are still under-indexed. While this wasn’t mentioned in the podcast, I’ll also note that wealthy friends and family, fund-of-funds/incubators and established VCs are also common LPs in Fund I/II. Mark notes that professional money managers are usually easier to close than private investors (~10:00), but the reality for most EMs is that you will be pitching/closing private investors as the majority of your LPs.
Don’t read too much into early enthusiasm (~16:45): First conversations are incredibly easy because everyone is nice in a first meeting. Then nothing happens. The middle of your sales funnel (the “mid-funnel”) is where all of the hard work and filtering happens (and “where everything dies”). Don’t assume an LP is going to back your fund until they’ve made some soft commitment (ideally in writing - like on this soft-commitment letter template)
Have a 6-month LP engagement plan before you start fundraising (~19:00): Succeeding in the mid-funnel is about having a campaign that sustains itself over months. You need a drip campaign of documents/materials, and multiple excuses for engagement (like in-person visits or events). If you have more than one GP in your firm, don’t take the first meeting together - use introducing each GP as an excuse for another meeting. More on this at Mark’s blog, Both Sides of the Table.
Demonstrate that you are a trustworthy long-term steward (~31:00): The thing your LPs are fundamentally buying is trust. You must convince the LPs that you will be all in and focused on managing their money in their best interest for 12-15 years - which is how long many pre-seed/seed funds will take to deliver returns to their LPs. You may also need to check the other boxes - partnership team reputation, deal flow, competitive differentiation, track record of successful investing - but ultimately LPs’ investment “intuition” will be driven by whether they feel they can trust you as a fiduciary. This is especially hard to communicate if you’re a new manager, but can be done - Mark mentions repeated meetings and asking references to pro-actively reach out to potential LPs as tactics for building trust.
Your “no”s for Fund I are your Fund II funnel (~10:15): VCs hate being told no, but don’t react negatively or cross an LP off your list just because they say no to Fund I. Your Fund I LPs won’t necessarily have liquid capital to invest in your Fund II, even if Fund I is doing well, so you’ll need to convert new LPs (a great insight from
in the first ever Venture Unlocked episode). Stay engaged with qualified LP leads through your current fund cycle and some of them will be your first backers when it’s time to raise Fund II.
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Thanks for reading! If you’re an emerging fund manager or aspiring-EM and need help launching or running a fund, schedule a call with me here. My law firm, Lidow PC, is devoted to working with EMs like you.