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How do you build a new VC fund without any personal savings from scratch?

echojason@gmail.com'

JASON LEMKIN

The key it to either (x) start small and/or (y) partner with someone that has done it before.

As David S. Rose points out, in any traditional venture capital fund, the partners are expected to put in 1–2% of the fund (I did a bit more, by way of example) out of their own pockets.

So if you were somehow able to raise a $50m fund, you’d have to come up with 1% of that to contribute yourself. Not up front, but over the course of 5–7 years. That’s a lot. If you have no savings, it’s impossible.

But that’s only the rule if you raise from traditional, institutional LPs (the investors that in turn invest in VC funds).

If you can somehow raise a small first fund of 5%-10%, the LPs will be more flexible. 1% of a $5m fund is only $50,000, and the LPs may let you defer that or reduce it in a number of ways. LPs in tiny funds just may not care as much. They typically will be high net worth individuals, not institutions like endowments.

In addition, there’s another hack that works well: find a partner with a track record and money. And partner with her/him. The track record will enable him to raise the funds. And if she has made enough money — she can cover the entire “capital commit” for the partners. The LPs typically do not require the capital commit to be equal. If the partners have to come up with $1m for the fund, it may be fine if one of the partners comes up with 95%, and the other 5%.

Nothing is easy in starting a fund. Everyone wants one, it’s hard to make money, and the pool of LP capital is limited.

But there are proven patterns.


Finally, let’s just make sure you really want to do this.

Assuming you are able to raise a $5m fund to start, with 2% “management fees”. That means you’ll get 2% of $5m to pay expenses each year, or $100k. Take out rent, travel, etc. and maybe your salary will be $70k. If you’re lucky.

Now let’s assume the fund does 3x net. Which is top 20% performance. But the thing is, it will take 10+ years to realize those gains as an early-stage investor.

3x net = $10m gains on $5m fund. $10m x 20% = $2m in gains, but that’s over 10+ years. Or $200k a year in gains IF you are a Top 20% investor.

That may be worth it. But can you put in the 10+ years to get there? On that $70k salary? And what if you aren’t Top 20%, and make basically nothing?

If the math doesn’t scare you, press on.

If it does, find an easier way.

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Published on November 19, 2017
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