Q: What is the process of raising a VC fund like?
It really varies — a lot.
First, there is a bit of a chicken-and-egg element. If you have a strong track record, it’s pretty easy to raise a fund the last few years. Because the LPs (folks that invest in VC funds) want to put their money into winners. And LPs have put more and more money into venture as an asset class.
And until about 2015 or so, it was hard to raise your own fund. LPs mostly wanted to stick with proven brands.
But … then, things began to change as we got 10 years into a bull-run.
First, many LPs decided they wanted to pick their manager, not just the fund. They’d rather take a chance funding a new firm with a somewhat proven VC with a hot hand … than invest in an established firm where the VC with the hottest hand was a partner with 4 folks with less-strong investments.
This also create a cycle where GPs became portable, finally. So more and individual VCs with hot hands left mediocre firms, or firms that were in decline, or firms that weren’t handling generation transition proactively.
Second, many LPs decided that micro VC and emerging managers was a place to put their money. It’s more work to write a $5m check into a small fund than a $50m check into a proven fund. It might even be 10x the work. But many LPs decided it was worth the effort.
So it got easier … but also harder. Why harder? Because as soon as market dynamics changed, 500+ small VC funds were raised since 2015!
So on a day-to-day level, what’s it like?
One, if you have a strong anchor AND a track record, it’s not hard in 2020. That’s the chicken-and-the-egg, but if you successfully invested in a few unicorns AND have a strong initial LP, you can get the rest of the fund together. Maybe even just in 30–60 seconds.
Two, today, if you don’t have a strong anchor, it’s hard to get momentum. There are just way, way too many folks trying to raise a fund now.
Three, existing funds are raising a lot more. This is, in some cases, tapping out LPs. If their existing managers are going back to market faster, and raising bigger funds, many are overextended. LPs only have so much capital.
Net net, if you have a hot hand in 2020, you can raise a fund faster than ever. Maybe even just by email.
But if you don’t, it may take 18–24 months. And it’s hard. There’s a lot of noise. And a lot of angels with strong track records.