20VC The Memo How to Raise a Venture Capital Fund (Part I) The Core Lessons from Raising $400M Over The Last Four Years The Biggest Mistakes VCs Make When Fundraising How To Find and Build Relationships with New LPs

In this episode of "20 VC: The Memo," Harry Stebbings shares his insights on raising a venture fund, drawing from his experience of raising nearly $400 million. He emphasizes the importance of setting a strategic fund size, which dictates investment style and LP expectations. Stebbings warns against setting overly ambitious targets that may hinder momentum, advises on determining the minimum viable fund size through portfolio construction, and stresses the necessity of a diversified LP base to mitigate market cycle risks. He also discusses team composition, highlighting the value of a proven track record and prior collaboration to reduce perceived team risk by LPs. Stebbings further explores LP engagement strategies, including leveraging existing relationships to create an LP acquisition flywheel, and underscores the importance of gradual relationship building with institutional LPs for future funds. The episode also features Angellist and Ironclad, tools that streamline fund management and startup operations, respectively.

• Harry Stebings discusses lessons learned from raising close to $400 million for venture funds.
• The focus is on the process of raising a venture fund, including first-time funds and subsequent ones.
• Harry invites feedback on the show format via Twitter.
• He emphasizes that these are personal experiences and encourages sharing other opinions on Twitter.

"Today we're focusing on the topic of raising a venture fund. Now this could be a first-time fund or a subsequent fund, but this is the first episode in what will be a series in the biggest lessons I've learned from raising close to $400 million over the last four years."

The quote introduces the episode's topic, which is about the intricacies of raising a venture fund based on Harry's experiences.

• Harry endorses Angellist for simplifying the process of launching a fund.
• Angellist removes friction for fund managers and offers a suite of startup products.
• It allows startups to focus on building their company by handling incorporation, banking, and cap tables.

"Angellist is making it easier than ever to launch a fund. I love using the Angellist platform because it removes all the friction associated with starting and scaling a fund."

Harry explains the benefits of using Angellist for fund managers and startups, highlighting the platform's ease of use and comprehensive services.

• Ironclad is a platform that handles various contract types in one place.
• It eliminates the need for multiple tools for drafting, editing, negotiation, storage, and search.
• Harry values the peace of mind Ironclad provides regarding contracts.

"With Ironclad, there is no need to buy separate tools for drafting, editing, negotiation, storage, search and everything in between. Ironclad just puts it all in one platform, making contracts fast, secure, compliant and airtight."

The quote emphasizes Ironclad's all-in-one solution for contract management, which simplifies the process for founders and businesses.

• The size of the fund you raise is the most critical strategic decision.
• Fund size determines the type of investments and the expectations of investors.
• Different fund sizes lead to different investment approaches and partnerships.

"Today, your fund size is your strategy. The most important decision you will make is the size of fund you raise."

Harry stresses that the fund size directly influences the fund's investment strategy and the role it will play in the market.

• Momentum is crucial when raising a fund, and is dictated by the amount raised and the speed of fundraising.
• Smaller funds can create momentum more easily due to the perception of rapid progress.
• Fund managers should determine their Minimum Viable Fund Size (MVFS).

"One of the most important elements in raising for a fund is creating the feeling of momentum in your raise."

The quote highlights the importance of creating a sense of progress and urgency when raising capital for a venture fund.

• MVFS is calculated by considering the number of investments, diversification, and average check size.
• Fees, usually 2% per year over a ten-year fund life, must be accounted for in the MVFS.
• Using a $10 million fund example, Harry recommends 30 investments with an average check size of $250k, after accounting for fees.

"Do the work to figure out your minimum viable fund size, or MVFS. This is the minimum size of the fund that you can execute your strategy on."

This quote advises fund managers to calculate the smallest fund size that allows them to effectively carry out their investment strategy.

• A diversified portfolio is crucial, with 30 companies being a good level for an early-stage fund.
• Too few investments increase risk, while too many can dilute potential returns.
• Harry advises against both extremes, advocating for a balanced approach.

"You are not a good enough picker at seed to only have 15 investments. You need a large enough level of diversification and 30 is generally considered large enough when you run the maths."

Harry explains the necessity of diversification in early-stage funds to mitigate risk and increase the chances of success.

• Reserves are funds set aside for additional investment in existing portfolio companies.
• Funds vary in their reserve strategies, from 0% to 70% for follow-on rounds.
• For a $10 million seed-focused fund, Harry recommends a no-reserves policy, using SPVs for breakout companies instead.

"Any breakout companies you can go to LPs and create SPVs to concentrate further capital into your best companies."

Harry suggests using Special Purpose Vehicles (SPVs) to invest further in successful portfolio companies, providing flexibility and potential deal-by-deal returns for the manager.## Fundraising Targets and LP Confidence

• Setting realistic fundraising targets is crucial for securing LP (Limited Partner) investment.
• LPs are often skeptical about investing in first-time funds due to uncertainty about the fund's ability to raise capital.
• An achievable target helps LPs envision the fund's successful closure.
• It's advisable to set a lower target with a higher hard cap to maintain LP confidence.

"You can always have a hard cap that is significantly higher, but you do not want the target to be too far away."

This quote emphasizes the importance of setting a reachable target for fundraising to ensure LPs do not doubt the fund's viability.

• The team's experience and history of working together are critical factors for LPs.
• LPs prefer managers with a proven track record in the investment stage the fund will focus on.
• A history of successful investments and returning capital (DPI) to investors is now more valued than TVPI or paper markups.
• Demonstrating a prior working relationship among team members reduces perceived 'team risk'.

"Team composition is everything. Simply put, and LPs, like managers who've invested in the stage you are wanting to invest in moving forwards, they'd like to see track record important."

This quote highlights the significance of the investment team's composition and their previous experience at the desired investment stage, which is a key consideration for LPs.

• The size of the fund dictates the deployment strategy and the type of LPs likely to invest.
• Tailoring messaging and product marketing to different LP types is essential.
• Large endowment funds and fund of funds have contrasting expectations regarding fund growth and size.
• Institutional LPs generally show interest in funds raising over $25 million to keep their investment below 20% of the total LP dollars.
• Raising a larger fund may be easier as it attracts institutions capable of writing larger checks.

"The size of fund you raise will dictate how you deploy that fund. The size of fund you raise will also massively dictate the type of investors that will invest in your fund."

This quote underscores the direct correlation between the size of the fund raised and both the fund's deployment strategy and the investor profile.

• A diversified LP base is vital for fund stability.
• No single LP should comprise more than 20% of the fund to avoid concentrated risk and demands for preferred terms.
• Diversification across LP types (endowments, fund of funds, corporates, founders, GPs) mitigates risk across market cycles.
• Funds primarily backed by a single LP type may struggle during market downturns, as seen with micro funds reliant on GPs and public company founders who are currently less active in LP investments.

"You want to have a diversified LP base... No LP should be more than 20% of the fund at a maximum."

This quote stresses the importance of maintaining a diversified LP base to prevent overreliance on a single investor type and to ensure fund resilience through market fluctuations.## Fundraising Challenges for Emerging Managers

• Many funds raised in recent years may struggle to secure subsequent financing.
• Emerging managers often face difficulties maintaining momentum and enthusiasm during the fundraising process.
• A common mistake is attempting to raise funds from large institutional investors without pre-existing relationships, which can lead to a loss of momentum.

"The biggest mistake I see early fund managers make is they go out to large institutional investors that they do not have an existing relationship with and they spend three to four months trying to raise from them."

This quote highlights a strategic error made by new fund managers who target large institutions without prior connections, resulting in wasted time and lost fundraising momentum.

• Harry Stebings discusses the importance of diversification in the context of his own fund, 20 VC.
• The majority of 20 VC's funding comes from a small number of large investors, including endowments, family offices, high net worth individuals, and funds of funds.
• The remaining capital is sourced from a larger group of smaller investors, creating a community of over 50 individuals contributing to the fund.

"We have $100 million invested from five large institutions... The remaining $40 million of the 140,000,000 originates from smaller institutions or individuals."

This quote reveals the funding structure of 20 VC, where a significant portion of the capital is concentrated among a few large investors, with the rest coming from a broader base of smaller contributors.

• Selecting LPs can be strategic, helping fund managers cover potential weaknesses, such as lack of visibility or deal flow in certain geographical regions.
• Harry Stebings shares his approach of including unicorn founders as LPs to strengthen the fund's presence in markets like Australia and LATAM.

"I was thrilled to add founders from Atlassian, Lingtree, Mercado Libre, Rappi and Newbank as lps to really help in regions where I do not have such visibility and an active presence."

This quote explains how incorporating influential founders as LPs can enhance a fund manager's coverage and deal flow in specific areas where they previously lacked a strong network.

• Fund managers should start their fundraising with 'friendlies'—those who are likely to invest early on—to create a sense of progress and momentum.
• Communicating with existing LPs about new notable investors can foster a sense of participation and success, potentially leading to additional LP referrals.

"Fill your restaurant with friendlies... The best managers bring their lps with them for the fundraise journey."

Harry emphasizes the importance of involving known and supportive investors early in the fundraising process to build momentum and engage LPs in the journey.

• Setting a minimum check size can be a mistake as it may exclude valuable LPs who could contribute more than just capital.
• The reputation of an LP can provide social validity, but the impact is diluted if the LP is invested in numerous other funds.

"Do not set a minimum check size for people to invest in your fund... The bigger the name that you have invested in your fund, the better you can use it for social validity."

Harry advises against setting minimum investment thresholds and highlights the importance of having well-respected LPs for social proof in the fundraising process.

• The process of finding new LPs differs from venture capital as most LPs are not publicly visible through social media or content creation.
• Creating an LP acquisition flywheel involves leveraging existing LPs for introductions to potential new investors.
• Personalized and concise communication can improve the likelihood of successful introductions.

"Create an LP acquisition flywheel... The most powerful... Create a personalized and concise email they can forward to the LP."

Harry outlines a strategy for identifying and engaging new LPs by using existing relationships to generate a self-reinforcing cycle of introductions.

• VC managers can introduce fund managers to their LPs, which carries significant weight.
• A reluctance to make such introductions is deemed shortsighted, as quality managers will succeed regardless, and LPs appreciate high-quality deal flow.

"Get your VC friends and community to introduce you to their lps... Do not be too protective of your lps from other managers."

This quote encourages fund managers to seek introductions from their VC network and criticizes the protective stance some VCs take regarding their LPs, which can hinder opportunities for both LPs and emerging fund managers.## Cold Outbound for LPs

• Cold outbound for LPs is challenging.
• PitchBook is a useful but expensive tool for LP discovery.
• LinkedIn can be leveraged to find potential LPs based on their investment history.
• Clearbit is a Chrome plugin that helps identify contacts within an organization.
• Building relationships with institutional LPs takes time and is often a multi-fund process.
• Regular updates and meetings with LPs can build trust and familiarity.

Cold outbound for LPs is really hard.

This quote emphasizes the difficulty of reaching out to limited partners (LPs) without any prior relationship or connection.

PitchBook...is worth it for LP discovery.

PitchBook is highlighted as a valuable resource for discovering LPs despite its high cost.

With Clearbit, you can simply insert the URL for the organization you would like to speak with...

Clearbit is presented as a tool that can provide contact details for individuals within a targeted organization, aiding in the outreach process.

LPs invest in lines, not dots, especially for institutional LPs.

This quote underscores the importance of building a relationship over time with LPs, as they prefer to invest based on an established track record rather than a single interaction.

I always meet two new LPs every week.

Harry Stebings shares his strategy for relationship building, which involves consistent, regular engagement with new and existing LPs.

• Start by understanding that LPs, especially institutional ones, require a history of engagement before investing.
• Use initial meetings with large institutions to learn what they need to see for future investment rather than expecting immediate commitment.
• Provide tangible evidence of meeting their investment criteria in follow-up discussions.
• Regularly update LPs on progress to build trust and communication.

It is so rare that an institution will meet you and invest in you without an existing relationship...

This quote highlights the importance of having pre-existing relationships with institutional LPs before seeking investment.

...what do I need to do for them to invest in the next fund?

The focus here is on understanding the LPs' requirements and concerns to address them in the future, thereby increasing the chances of securing investment in subsequent funds.

...ensure with every quarter I have a check-in with them and ensure that they each have a quarterly update.

Harry Stebings discusses the importance of regular communication with LPs, which helps in building a strong, ongoing relationship.

• AngelList simplifies the process of starting and scaling a fund, removing the associated administrative burdens.
• Ironclad offers a comprehensive platform for handling all types of contracts, streamlining the process for businesses.

Angellist is making it easier than ever to launch a fund.

AngelList is praised for its ease of use and support for fund managers in the venture capital ecosystem.

Ironclad is the only platform built from the ground up to handle all contract types.

Ironclad is introduced as an all-in-one solution for contract management, offering a wide range of functionalities that were previously handled by multiple tools.

...having that peace of mind when it comes to contracts, it's so invaluable for me.

The quote reflects the sense of security and convenience that Ironclad provides to founders and businesses in managing their contracts.