42. Raising a VC Fund (Jonathan Struhl)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Jonathan Struhl of Indicator Ventures joins Nick to discuss how he raised his first VC Fund. We will address questions including:

  • Struhl Raising a VC FundWhat are the types of venture funds and what are their key differences?
  • How do venture funds establish a strategy or investment focus?
  • An LPA and PPM are necessary when raising a VC Fund… can you explain what they are?
  • Can you provide an overview of management fees and carried interest, the general range for each, and how they are paid out?
  • You have a variety of expenses as a fund manager (administrators, tax prep, legal, etc.)… can you outline the categories of expenses and what they are for?
  • What % of the fund do you actually expect to put to work in investments?
  • How much of the funds capital is deployed into new startup investments, vs. how much is reserved for future years when those startups that you initially invested in are doing a subsequent fundraise?
  • What are the typical types of limited partners/investors?
  • Once you have a commitment from LPs, how is capital called?
  • What happens if a capital call is made and an LP does not fulfill their agreement?
  • What is the average time to return for the investors/LPs? Do LPs receive actual cash distributions prior to closure of the fund? If so, when?
  • Can you walk us through your personal experience and process of raising a micro-VC fund…  including how you decided to raise the fund, the key decisions you made and how the process played out?
  • How did you identify potential LPs and how did you approach them about investing?
  • What are the common reasons why potential LPs say no?
  • What was your first major milestone in the fundraising process?
  • What advice, tips or insights would you give to someone considering raising their own fund?

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Guest Links:

Key Takeaways:

 

1- Fund Structures and Types
 
The standard venture fund may differentiate on the following factors…
Stage: Based on progress and how mature the startup is
Sector: Areas, verticals, trends that are a part of the investment strategy
Geography: Parts of the country or world in which investments will be made
Expectations: What business-models and success metrics will fund managers and LPs plan to invest in. In Jonathan’s example he discussed how the east coast is more monetization and revenue-focused while west coast is much more user growth focused.
 
Documents required when raising a fund…
PPM, Purchase Price Memorandum: Detailed, traditional business plan wrapped in a lot of legal disclaimers. Risk factors, the team and the strategy. Similar to a giant term sheet between managers and LPs.
LPA, Limited Partnership Agreement: Governing doc w/ by-laws.
Subscription Docs: “”Cover your butt”” doc. Verifies, in writing, that your investors are accredited.
DDQ, Due Diligence Questionnaire: All the details of the fund. Current portfolio, track record, team makeup, fees and expenses and co-investment rules.
 
 

2- Main Reasons Why LPs Say No

  • Over allocated in the VC asset class. Most LPs only allocate a small percentage of their capital to venture.
  • Venture Capital is too risky for some LPs.
  • Liquidity issue, no dry-powder.
  • Timing, could be off-cycle for an investment or immediately after they’ve deployed significant capital.
  • Small funds may be too small for institutions to move the needle. Minimum investments could be $50M.
  • Don’t like emerging, first-time fund managers.

 

3- Eight Tips for the Emerging Fund Manager

  1. Don’t raise a blind pool. So John had previous angel investments that were preforming well, and he could roll them into the fund portfolio at their cost basis, such that investors were buying into a fund that already had some traction. And it also signaled to investors the types of opportunities that he was able to source and close.
  2. Skin the game. So John also cited GP committment as another signal that incentives are aligned between the fund managers and the LPs
  3. Building a strong and experienced team around you.
  4. Have a solid Strategy w/regards to the Three Pillars of Fund Managment (dealflow, diligence and portfolio maintenance)
  5. Getting a great legal team
  6. Develop macro views of the world. How does one see the world 10 years or 20 years from now. If you have conviction about how the future might look, the investment thesis can be built to support that.
  7. Start small, manage expectations. So while it’s good to be very optimistic, one should be practical when communicating expectations to LPs so that they understand potential returns and the long time-horizon of those returns.
  8. Have a strong and established Due Diligence Process w/ examples that can be shown to LPs

 

 

Tip of the Week:   Economics of a VC Fund

 

FULL TRANSCRIPT