Everybody is starting a fund. Is it the right decision for you?
We‘ve seen an explosion of new VC funds over the last few years driven by:
- Infrastructure such as AngelList makes starting and managing a venture fund more accessible and cheaper
- The rise of tech entrepreneurship globally, increasing the number of pools of trusted networks well beyond Silicon Valley
- Maturing social networks and media distribution channels that empower individuals to build their own audience and brand, accumulating social capital to raise from LPs and attracting founders
- Growth in the number of accredited tech talent that can now legally and financially afford to invest in funds (often their friends’ funds), creating a new class of LPs
There are many good reasons to start a fund. It can be very lucrative, provide tremendous autonomy, fund the growth of a team, set the beginnings of a long-term franchise, and more. But it’s a big responsibility and may not be the right direction for everyone.
In this post we’ll cover options to consider before starting a fund, pros/cons of different investing approaches, questions to consider when deciding if a fund is right for you, and how other fund managers navigated this decision.
If you only have a few minutes, here are some key takeaways to consider on starting a fund:
- The stronger your investing track record, the easier it is to raise a fund. Starting a fund is not the only way to build your investing track record. Many start by angel investing, scouting or joining a fund.
- It’s become easier to raise a fund, but harder to standout. Founders have more options on who to raise from than ever before and as a result, the airwaves in venture are getting more crowded. Before starting a fund, it’s important to identify your edge that informs your strategy. This is critical before accepting capital from LPs as this needs to align with your fund construction and pitch.
- A fund comes with strings, but provides more leverage. Investing other peoples’ capital is a force multiplier on your investment activities. If your access to good investment opportunities currently outstrips the capital you have available to invest, a fund can allow you to put more “money to work”.
- Building a fund is a long-term commitment. While most funds are deployed in 2-3 years, the portfolio can take a decade or more to get liquid with portfolio support and administrative responsibilities along the way.
As we all know, there are multiple paths to investing in startups. It’s important to evaluate all options:
- Angel invest – Invest personal capital into startups
- Scout for a fund – Assist an existing fund with sourcing deals and deploying their capital
- Join a fund – Join an existing investment team
- Run SPVs – Raise capital from LPs on a deal-by-deal basis
- Start a fund – Start your own fund deploying LPs’ capital
We’ll go deeper into each option below.
This is best option for those who want to start investing immediately without the burden of raising from LPs and long-term commitment that comes from managing other peoples’ capital. But you need sufficient personal capital to do so, and most should plan to invest in at least four companies/year to build a meaningful track record and acquire enough “reps” to mature as an investor.
- Deal-by-deal liquidity
- No need to fundraise
- Build a reputation under your own name
- YOLO into deals without justification
- No leverage on capital
- Money required, ideally enough to build a portfolio and diversify
Scout for a fund
This is the best option for those who have strong access to networks of founders and want to pursue investing part-time but lack sufficient personal capital to angel invest. It may also be limited to those with pre-existing relationships with VC firms as many don’t publicize their scout programs widely.
- Relatively accessible (emphasis on *relatively*)
- No personal capital or financial accreditation required
- Typically very flexible, sometimes non-exclusive
- Often requires a connection to VC firm to be given a chance
- Dependent on a single capital provider and brand
- Possible signaling issues (although this is rarely an issue)
Join a fund
This is the best option for those who want to invest full-time, learn from experienced investors, and draft off a well-recognized brand name. Some people also prefer to operate in more of a team environment.
- Opportunity to learn from experienced investors
- Potential compounding advantages working as a team
- In many cases, capital is already raised
- Can be less effective in building your own brand
- Monday partner meetings (i.e. often need to internally "sell" deals but some view this as a pro)
This is the best option for those who value flexibility, have the bandwidth needed to raise capital for every deal, and want to build up their track record with LPs.
- Deal-by-deal carry
- Leverage from deploying LPs’ capital
- Flexible for low and high-volume investing
- Builds trust with investors
- It's a lot of work – every deal is a mini raise
- Unable to guarantee capital for the founder until it’s raised
- Can take too long for competitive rounds
Start a fund
This is the best option for those who have a proven track record (although not always required), want to maximize leverage on their dollar, plan to build a team, and see a path toward building a long-term franchise in venture.
- LP capital provides leverage
- LPs can help with deal flow, diligence, and portfolio support
- Management fees can be used to pay bills, hire a team, etc.
- Ability to build a brand with a high level of autonomy
- Fundraising is a time-suck
- LP capital needs to be returned first before GPs get carry
- GP commit required (although this can be smaller than most people assume)
- You now have bosses (your LPs). Congrats!
How to decide to start a fund (or not)
Here are some questions to ask yourself to decide if starting a fund fund is right for you:
Do you have strong deal flow and access? Be honest!
The more proven your access to good investment opportunities, the easier it is to raise a fund and deliver returns. Angel investing, running SPVs, scouting, and joining a fund are all ways to build your track record.
A strong brand can help here. There are many ways to build a brand, but it should be relevant, differentiated, and authentic (see our post on The Reverse Pitch).
Do you want to deploy more capital to capitalize on your access?
There are scenarios where your access outstrips the capital you have to deploy. You have access but:
- Lack personal capital to angel invest
- Don’t have enough personal capital to create a diversified portfolio (i.e. invest in enough companies)
- Your angel checks are much smaller than the allocations you can secure
In these scenarios, starting a fund might be the right decision for you as investing LPs capital will give you leverage to further capitalize on your access.
Do you see an opportunity for a new fund to exist?
Differentiation in venture is more important than ever before. Founders have more choice on who to raise from than ever before. It’s important to think of a fund like a product with its own value prop and target audience. You don’t want to sell a commodity. Furthermore, it’s helpful to consider “why would a founder want to take my money?” If you can’t answer that, you might only be selling green dollars, attracting negative selection bias.
Starting a fund might be the right choice if you see an opportunity in the market for a new firm to exist, one you’re uniquely qualified to build.
How much bandwidth do you want to dedicate to building a fund?
Fortunately, the infrastructure to run a venture fund is more accessible today, but raising, building, and running a successful fund takes a lot of effort. It’s very possible to run a fund part-time (Weekend Fund started this way) but in comparison, angel investing, scouting, and running SPVs provide a lot more flexibility.
How committed are you to building a firm for the long-term?
Once you’ve closed your fund, building a VC firm is a long-term commitment. While you’ll like deploy your fund in 2-4 years, your portfolio can take over a decade to mature, and one fund might turn into multiple funds. Only start a firm if you’re committed for the long term.
How much do you value autonomy?
If you start a fund, you now have bosses (your LPs).
How fund managers decided to start a fund
We asked some fund managers how they navigated the following decisions:
- How did you first get into investing and any learnings from that experience you’d like to share with others that might want to take a similar path?
- Why did you decide to start or manage a fund?
Andy McLoughlin @ Uncork’s path into managing a fund
Andy built a strong brand with European entrepreneurs by helping them break into Silicon Valley. He offered founders something that was differentiated, something they valued, and something he had insight into as he moved from Europe himself. He used his reputation to angel invest into deals, building up a track record, and eventually, helped raised his fund, Uncork.
More from Andy:
I fell into angel investing after moving from the UK to San Francisco in 2010 when my startup Huddle raised its Series B. We'd taken a small amount of secondary and as I lived a pretty simple lifestyle I decided to start investing my cash in other entrepreneurs I met along the way. Many of them were Europeans who were also trying to "crack the valley" and I was able to help with navigating stuff out here - getting their US operations set up, hiring, sourcing the best service providers, networking, etc. I was able to put the first money into some amazing companies like Postmates, Intercom, Pipedrive, Calm, Tray.io,and Bugsnag. There has always been a lot of angel money out there but if you can provide real, differentiated value to entrepreneurs (and importantly actually do what you say you will) you'll hopefully find that people will come to you and carve out space in their rounds for you to invest.
I realized that I loved investing more than I loved running startups - some people are just better suited to one versus another, and being a scattered generalist works very well as an early-stage investor versus a growth-stage company executive). I was able to spend time with my now-Partner at Uncork, Jeff Clavier, in late 2014 when he asked if I'd considered starting my own fund. I had a solid (if early) angel portfolio and could probably build something interesting around providing a bridge for Europeans coming out here. I'd fallen into entrepreneurship by accident and frankly, we f'ed up a ton of stuff along the way - if I wanted to be a great investor it made sense for me to learn from someone who had been through the hard knocks of venture themselves and could provide apprenticeship and support. Jeff and I now run the fund together as co-Managing Partners and I've been able to draw upon all of his experience over my last 7.5 years. I genuinely feel like I have the best job in the world.
Why Nikhil Basu Trivedi @ Footwork’s started a fund
Nikhil Basu Trivedi was previously an investor at Shasta Ventures where he built a strong reputation. He started Footwork to build a new venture capital firm. He makes a distinction between a fund and a firm, and the long-term commitment required to build a firm.
More from Nikhil:
I decided to start a fund because I wanted to build a new venture capital firm. Not just one fund, but a firm, and to build the firm for hopefully the next several decades. My personal opinion is that you should be thinking about that level of timescale when raising a first fund, because, while you'll make initial investments out of that fund in a couple year timeframe, those investments will take a decade or more to mature. And one fund can quickly turn into multiple funds, and a decades-long commitment to managing those.
Wiz @ Spacecadet’s path into starting a venture fund
Wiz gradually scaled up the capital he deployed as he built up his track record. He started as an angel investor, graduated into running his own SPVs, and eventually started his own fund. His decision to raise a fund was driven by his desire to build a “storied VC” firm. He also touches on the practical considerations of how funding a new firm typically requires management fees.
More from Wiz:
I started with making small personal angel investments into deals that were "close" (founders who were in my immediate orbit). My first angel check was $1,000 into Backtrack. They reached out over Twitter. I had no idea what I was doing. I found Jason Calacanis' book, Angel: How to Invest in Technology Startups, helpful, lots of really practical advice. One great piece of advice was to expand your deal flow beyond what was close at hand to minimize selection bias. I joined a bunch of AngelList syndicates and invested a lot more on AngelList. In the direct investment opportunities I was getting, I was realizing that I could probably get more allocation than my tiny personal check so I "graduated" to running my own AngelList syndicate SPVs to get more leverage on my own money. Building an AngelList syndicate was a lot of work. It took us around a year and 30+ deals to build a large enough LP base where we could get deals done on our own. Unfortunately, it sounds like it's even harder now with increased competition plus less LP liquidity.
We want to build Spacecadet into a storied VC. It's going to take resources to do that. Raising a fund was our clearest path to having enough resources (management fees) to build (especially using Ryan's front-loading tip!).
Ariana Thacker @ Conscience VC’s path into starting a fund
Ariana started her career as an investor by joining a larger fund, built up her track record by angel investing, and raised a “starter fund”. Eventually she raised her own fund Conscience, driven by the opportunity she saw in the market for a fund investing at the intersection of consumer and science.
More from Ariana:
Early in my career I fell in love with early-stage startups, and saw investing as the most scalable way to drive impact and support entrepreneurs. I was at a lead investment firm focused on deep-tech investing, and then branched off with building a smaller starter fund/fund "0" + angel investing before formally launching Conscience.
I am specifically passionate about partnering with early-stage founders innovating at the intersection of consumer and science, or in other words: technically defensible businesses that benefit the individual. The future vitality of humanity and the economy will depend, to a large extent, upon scientific advances. Conscience VC, my firm, is a mechanism to more directly commercialize these breakthroughs.
Karine Hsu @ Slope’s path into starting a fund
Karine initially started investing through a student fund, Dorm Room Fund, in college. To get more exposure, she started working with a larger VC fund part-time to help them with research. Through her agency Slope, she found strong access to early-stage startups and eventually started a fund to accompany her work with early-stage startups.
More from Karine:
I first got into investing in college during my freshman year. I was lucky to grow up in the heart of Silicon Valley, so I was familiar with the world of startups and venture capital, and knew I wanted to get as much hands-on experience as I could. Dorm Room Fund was the first real investing experience I had. It was a crash course into early-stage investing, an incredible community of like-minded people passionate about tech, with great mentorship and capital provided from First Round Capital. If you’re still in school and even remotely interested in tech + investing, I’d highly recommend checking out Dorm Room Fund or other similar communities.
While in school, I also ended up getting connected to a college alum who was at GGV Capital at the time and needed help conducting research on college mobile app usage trends. I was a big fan of the GGV portfolio, so I tried gaining additional exposure in investing by doing the research and helping highlight interesting companies that I saw being started on campus on a part-time basis. If you’re looking to get some exposure into investing and there’s a fund that you’re excited to work with (whether or not you’re still in school), I’d definitely recommend trying to figure out how you can provide value to their team and start building a relationship, whether it’s through providing a unique perspective or access to interesting deals. The timing for Slope Fund worked out well. Slope as an agency had already been running for 2 years and had worked with 100+ early stage startups. With capital seemingly abundant in 2021 and founders looking for more strategic, tangible value-add on their cap tables, I decided to start a fund because I felt like there was a unique opportunity to start a hybrid agency + fund model, one that provided tangible value add design + marketing services from the agency and capital from the fund.
While it might seem like everyone is starting a fund (obviously, an exaggerated statement) we hope this is useful for those evaluating their options.
If you’re a fund manager, thinking of starting a fund, or just curious, subscribe to Signature Block if you haven’t already. If you think this might be useful for other managers, share on Twitter.
Lastly, let us know what topic you’d like us to cover in the next edition.
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