Generally there are three challenges. The first is non-obvious.
Challenge #1: Raising Another Fund. While Sequoia, Benchmark, Founders Fund, etc. etc. can all basically raise a new fund in about a week … on any terms … the majority of firms do struggle to raise additional funds. At a minimum, it’s something they think about all the time. If you can’t raise another fund, you get paid at least something to manage your existing investments for 10+ years. But the corpus decays over that time frame.
Why will the LPs give you another fund? Are you really producing Alpha to NASDAQ? Probably … not. Most VC funds don’t outperform Nasdaq, especially not adjusted for illiquidity.
Challenge #2: Winning Deals. Simply put, most firms that hustle with a brand eventually see enough pre-Unicorns to do OK. Then they have to “win” the best deals. Very early stage, it’s not always necessary, you may be about finding undiscovered gems. But once a company is hot … competition is fierce and real … and you gotta win.
Why will you win?
Challenge #3: Not Doing “Pretty Good” Investments. Some VC partners never even do 0.5x and throw huge amounts of $$$ down the drain. Just as common though is investing in “pretty good” companies. Founders are poised. Traction is there. Customers are happy. But … it will never be a rocketship. Problem here is, except in very small funds (<$50m), the exit values on these “Good” investments is never really high enough to return the fund. And then you can’t raise another fund (See Challenge #1).
How many Unicorns have you done? And why will you clearly be able to do more?