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


*Please excuse any errors in the below transcript

It’s great to be back with Episode 42 of the Full Ratchet. One of the bright new stars of New York venture capital, Jonathan Struhl is here with us today to discuss raising a first time fund. We address questions including the types of venture funds, their focus areas, LPAs and PPMs, a refresh on management fees and carried interest, percent of the fund that is deployed.

What type of LPs is the money raised from and how a compelling investment opportunity was created for a first time fund manager with no track record. Those and many other questions in today’s interview, we were fortunate to cover a lot of the mechanics of a fund as well as the interesting strategic questions.

And from what I’ve learned from Jonathan in the short time that I’ve known him, he certainly is helping to evolve venture capital with new ideas and a creative approach. With that, let’s get into the interview on raising a VC fund.

Today, we have Jonathan Struhl from New York City.

Nick Moran
Jonathan is a Co-Founder and Managing Partner at Indicator Ventures and at the age of 26, is one of the youngest fund managers that I’ve had the pleasure to meet. Jonathan, thanks for coming on the program and I can’t wait to hear how you did it.

Jonathan Struhl
Thanks Nick, much appreciated. I’m an avid listener, I listen on the subway every time into the office. I really enjoy it and I hope I could have a good podcast for the other people listening.

Nick Moran
[LAUGH] Lots of commuters listening to the show. But can you just tell us a little bit of your background and how you got into venture investing?

Jonathan Struhl
Sure, I grew up a fifth-generation entrepreneur. Everything was about business, I loved it, still love it, dinners, lunches, mornings, everything was about companies. I’ve seen 20, maybe 30 companies be started, a couple exited, most of them failed. And I always knew I wanted to do something with startups, specifically investing.

So after college, I started doing marketing for a CPG company, specifically, social media. It was my job to figure out how to leverage our investors who were some of the biggest celebrities and athletes on the planet including Lebron James, Serena Williams, Pitbull. And the idea was, and what I was tasked with, was how do I figure out how to leverage the brand that I was working with and the celebrity social channel?

So I basically created best practices some of these athletes and celebrities and was able to push a product that I was marketing through their channels. The entrepreneur in me went on to create a marketing agency where I work with influencers, athletes and celebrities, specifically on the social media channels and I would connect them with startup.

So that was one of my first intro into this startup space of a personal level. And I did lot of angel investing on the side, a lot of mentoring and so there’s a lot of incredible companies. And then I partnered with actually, my partner now in the fund and we started a larger agency, pure play social media agency that works with global complex brands and we would run social for them.

And really cool part and how I transition into VC was a larger brand client came to us and would say, you’re social media agency, you are on the ground floor with some of these startups. Help us identify them, help us find a new ad tech platforms, help us find a new consumer facing app.

Brands want to be the first to adapt to some of new stuff, so go out, invent a bunch of companies, bring them to our brand clients and then activate them. We end up seeing a ton of deals, would do a bunch of angel investing into these companies and we have a really interesting view into them because we were representing the larger brands.

And one day, my partner and I and our third partner now, Geoff, who’s a really strong finance background, came together like and said, this is what we love, we’re doing it, a ton of angel investing. The marketing space is fun and it’s interesting but we want to really focus on investing.

We’re seeing some incredible deals, so we transition into winding down what we were doing in starting Indicator Ventures.

Nick Moran
From your background, you’re able to identify startups’ position to pop and grow based on social and a number of other metrics, I’m guessing.

Jonathan Struhl
Yeah, and I think part of my background and what I’ve seen from working with this larger brand is, startups would to come to us when they’re ready to turn on their revenue. Right, it’s advertising part of your revenue. You want to be connected to large brands and that’s where we identify the right time and we would identify the right brand.

So early stage companies that are gearing up for revenue is our sweet spot, that’s where we have connections.

Nick Moran
Very cool. So today, Jonathan, I wanted to focus on the standard venture fund, and the topic of course is raising a venture fund. But before we launch into that, would you mind touching on some of the different types of venture funds that exist and maybe some of the differences between them.

Jonathan Struhl
Sure, so there are the traditional standard VC fund, that’s what we’ve created. That’s, I would call it 90, 95% of the funds out there that are doing early stage venture is the traditional funds. The standard 10 year fund life, with two 1-year extensions, so the fund could last for 12 years max.

And there’s about three to five years with a traditional model where you have to invest in new investments. And then after that three to five years, that’s when the partners sort of take a step back and just focus on follow on investments. And then, there’s other types of fund which were less common, which is sort of the evergreen, open-ended funds, which LP’s can end up selling their share.

If I can evergreen fund, I would say approximately four years, investors would be able to cash out, it’s usually at a discount. The problem with that is, a lot of these investments are illiquid, so in order to cash out, you need to basically be able to trade your position to someone else, and the valuation is only determined really by the last qualified financing.

The last qualified financing round could be a year prior to when these larger LPs are trying to cash out, so valuation’s an issue when it comes to evergreen funds and open-ended funds as well. The issue when it comes to liquidity is important. I think also, a lot of you investors, most institutions specifically, venture capital’s of a part of the larger asset diversification strategy, it’s really a small sliver of it.

So when you’re a large institution, you make a ton of investments in different industries and VC’s a really small piece of it. And to be able to understand when you’re gonna get your money back and to be able to liquidate at a certain period of time is really important.

Evergreen, open-ended funds as well, it’s tough to do that. Traditional is, I think, the best for LPs.

Nick Moran
So on that note with the standard venture fund, often VCs will have a focus or a fund specifically will have an area that they’re investing in or focus of some sort could be a thesis. Can you talk about what some of these focus areas may be and how venture funds differentiate from one another.

Jonathan Struhl
I would split it into a couple different categories. The first and important to look at when you’re talking about a venture funds focus is the stage at which they invest, it’s usually determined by size of the fund. Putting angel aside, individuals aside, there’s really three different stages at which funds focus on and start with seed early stage fund which is like an Indicator Ventures ourselves.

We get in when there is usually a bit of a product and a tiny bit of traction, not too much and we work very closely with the companies and help grow. And then, there’s growth stage, which is leading A round, B round, C rounds and that is really one product market fit.

If it has been established usually come in and add fuel to the fire. And then the third is later stage VCs, it’s usually pre-IPO. Returns are less lucrative on the later stage front because you’re not gonna get 100 acts on the later stage investment necessarily. But it’s potentially less risk with later stage investment.

So the first thing you look at is stage. And then I look at it industry specific. So there’s funds that stay opportunistic and look at a ton of deals and just open to decide which ones are the best deals for them, decide which experts they have on their team that can help them invest in certain industries.

Then there’s funds that are specifically consumer focused funds, we focus on e-commerce, anything that is selling or helping consumers. Then there’s B2B, enterprise sales, software as a service, that can really benefit businesses. So focusing on the end user is important for industry specific funds. And then you can get even more granular, hardware-focused funds, agriculture-focused funds, biotech, fintech, etc.

Some argue if it’s good to be really industry-specific or if staying opportunistic is important. I think staying opportunistic for a seed-stage fund is important because there’s so many deals out there. It’s really about the expertise that you have on staff. And then the third thing I’d look at is geographically specific funds.

With early stage funds it’s important to be hands-on, it’s important to work closely with these companies. One large client can make a small company and investing in proximity to where you are is really important. We tend to invest more in the East Coast, we’re based in New York and Boston.

And being able to bring companies into our office, being able to meet with them on a weekly, sometimes even more regular basis is really important. And then I think the last thing that I’ll say is expectations. Without generalizing, I have this theory on East Coast versus West Coast investing, and this is more for consumer facing companies.

I look at East coast investing and this is sort of our camp, as focusing a lot on revenue. Most people on east coast come from finance background and obviously revenue’s really important. Subsidiary people who have a finance background. East coast, like I said, is very revenue focused and it’s building a sustainable business and I think West Coast investing, specifically for consumer facing companies, there’s a lot about hyper growth.

It’s a lot about, let’s figure out how to get as many users as possible. Let’s put revenue aside for right now. Let’s scale this thing as quick as possible so that we can then go and turn on the revenue modes. And I don’t think there’s issue with either. I think it’s just a matter of philosophy.

But I think as you’re looking for focus a venture fund, West Coast versus East Coast investing, while it is generalizing, it’s a real thing and there’s something behind it.

Nick Moran
Any thoughts on why it’s evolved that way, this bifurcation on the coasts?

Jonathan Struhl
A lot of it has to do with the backgrounds of the general partners. So if you think about East Coast, it’s about large corporations, it’s about finance. It’s about partnership, it’s about scaling through customers and really focusing on building a sustainable business. And lot of people in the PE side of the house and a lot of people whether it’s accounting or have their CFA.

East Coast is really focused on revenue. And while investing for West Coast a little sexier, it’s a little more let’s find the next SnapChat, Fred Wilson said a third, third, and a third methodology. Which is a third of the companies fell, a third of the companies basically returned their money and then a third of them basically make up the fund.

Usually one unicorn so to speak, returns the entire fund and granted, spreads out on the East Coast. That’s a real strategy, right? Putting that together, knowing that before your about to raise the funds, and before you start investing. Is an interesting thing to think about and how we’re thinking about our fund is investing in sustainable businesses, taking more of that East Coast approach.

Nick Moran
Can we start out with LPAs and PPMs? These are often necessary when raising a venture fund and can you explain what they are and why they’re necessary?

Jonathan Struhl
I just went through this process. I learned a lot. I realize a lot of this stuff is semantics, but most of it is necessary. I’ll take you through a couple of them. And I might add a little more aside from the LPA and PPM. So PPM is a detailed, traditional business plan wrapped in a bunch of legal disclaimers to protect LPs.

It’s expensive, it’s time consuming, but it’s important. It includes everything from risk factors to the team to the strategy. Basically a giant term sheet between managers and limited partners. A lot of people do not read it and, like I said, it’s time consuming but it’s really, really important. And it’s sort of the backbone for the rest of the docs and building a fund.

The second thing is, like I said, an LPA, a limited partnership agreement which this is the governing doc. If you start a corporation you have bylaws. The LPA, essentially the same thing, right? There’s a lot of overlaps between the two. Limited partner are called limited partners for a reason.

They give the power of attorney to the managing company or GP. And the LPA is the doc that states that. If I can add a couple, in one of those subscription docs, I look at this as a cover-your-ass doc, and make sure your LPs are accredited investors. In writing, you have your investors prove that they are accredited.

And they sign that they understand the LPA and the rest of the docs. And this is really, like I said, a cover-your-ass doc. And then the last one, it’s is not necessary, it’s not a legal doc, it’s something that we’ve done, something that I would recommend for funds to do as well, it’s the DDQ, the due diligence questionnaire.

It shows all the key things the fund does. The more transparent you are when you’re raising, I think the better it is, so the DDQ shows everything from the current portfolio that you might have when your raising fund to track record, to your team, to your fund structure, fees and expenses, co investment rules, all that fun stuff.

So those are really the four doc that I would call out and highlight and like I said, I just went through the process of all this. It’s a really great experience learning everything.

Nick Moran
How long did that take to get the docs organized, mobilized, and then vet out some of those details, on the legal side of things.

Jonathan Struhl
Yeah, so part of what we did is, when we went out and decided to raise a fund, we spent About the first six months getting everything together, and by everything I mean specifically our legal docs. It took a while but the process of creating the legal docs really helped us put our strategy together, really helped us identify how we were gonna run this thing.

So it’s a chicken and the egg thing, right? Like we created a fund, and had our strategy and everything really buttoned up. But then these legal docs really helped us think deeper into our entire strategy. Took a couple months and it wasn’t a fun process, but it was a necessary process.

Nick Moran
So Jonathan, we’ve talked in the past about management fees and carried interest, I don’t want to spend too much time here. But can you recap how each of these work and maybe the approximate ranges of these for various fund sizes?

Jonathan Struhl
Sure, so management fees are typically about one to two and a half percent, I would say two percent is standard. And that means 2% annually on total committed capital. So it’s not the capital you have in the bank right now, it’s not the capital that you’ve drawn down to date, it’s in total committed capital.

And that’s paid to the management company and that’s distributed and not just used to pay people, but used for other expenses as well. If you think about a smaller fund, management fees, while they’re important, sometimes they’re insignificant. You have a sub $10 million fund, management fees are going to be very small, and working for carried interest is really important.

Now, getting into carried interest, it’s really the upside that the partners in the fund get. It’s how venture capital could be such a lucrative field. Once all of invested capital is returned to investors, the management company then keeps the percentage of the upside. Really, it’s a share of the profits.

Doing some math, $20 million fund, if you return a $100 million in capital, once you return the full and initial 20 million to investors, the management company gets 20% of that 80 million left. And so, it’s $16 million. Like I said, raising venture capital, and we can get into this a little later, but limited partners and investors in venture capital funds look for a couple things and they wanna be directly aligned with general partners of the fund.

And I think smaller funds, because management fees, let’s call it 2% on a dub, $10 million fund is so insignificant, they’re directing aligned to return capital to the investors, and return a lot of capital because that’s when their carry interest kicks in. So I think that’s worth pointing out at smaller funds, carried interest matters more, whereas you have a larger fund, that’s probably a billion dollar fund, and you have management fees which are insanely high management fees, incentive is lost a little bit.

For those reasons I think, early stage smaller funds are more LP friendly because they’re directly aligned to return capital and earned their carried interest.

Nick Moran
Yeah, venture capitalists aren’t getting rich on management fees, that’s for sure.

Jonathan Struhl

Nick Moran
[LAUGH] At least at the early stages. And sometimes the management fee will be reduced after the investment period, can you talk a little bit about this and how that works?

Jonathan Struhl
Sure, and that how we’re structured as well. Let’s call it 2% management fee, annually. Now, like I said there’s an investment period, so there’s a term. If you look at the fund life as ten years, There’s a specific term in order to invest in new companies. You’re not gonna invest in new companies throughout the entire ten year fund life.

It’s typically three to five years. If you’re looking at the real management fee that gets paid to general partners, it’s paid for a number of reasons, including identifying new companies, doing the diligence, and more importantly, working closely with these companies on a weekly, sometimes daily, basis. And for that, that’s why LPs are willing to pay management fees.

But once all that hands-on work is done and the fund is no longer allowed to invest in new companies, they reserve a pool to invest in follow-on in their current portfolio. Sometimes the management fees will step down. So ours is, we have a 2% management fees, we step down to about 1.5 after five years.

And investors in in funds, LPs, really like to see that because if you look at the blended rate, over the fund is about 1.75 and it’s under that sort of standard 2%. So LPs don’t have to worry about paying exorbitant fees when the fund managers have gone on and are no longer sourcing bill and doing diligence and working very closely with the companies.

Nick Moran
And then other fees like initiation or startup fees. I’ve noticed that in some cases these are carved out separately. In other cases, these are rolled into and part of the management fee. How have you guys structured additional fees on the fund initiations side?

Jonathan Struhl
When a fund has an expense there’s two places that expense can be paid by. There’s a management company, which is at 2% annual, which is essentially paid to the general partnership and to sort of the rest of the team on the fund working on a daily basis, and that’s two percent annually.

And then there’s a fund expense which comes out of the total committed capital. Now every time a fund incurs an expense, you have to decide where it’s allocated to. Things like legal, setting up fund docs, fund administrative work like distribution of capital, accounting, tax work, auditing, that sort of stuff that’s really important to running a fund comes out of the fund itself, so out of the total committed capital.

We call that a fund expense. And then the other expenses, things that are not necessarily necessity. Things like travel, which are important, but you don’t have to travel. There’s things like dues and subscriptions, and different tech that you end up needing to buy, an Apple watch, for example. Those things can come out of the total committed capital and be called the fund expense, or they can come out of the management company 2% annually.

So I think knowing the difference between those two is really important for identifying the different expenses that go into a venture capital fund.

Nick Moran
So what percent of the fund do you actually expect to put to work in investments?

Jonathan Struhl
Talking about managing fees, and then some of the other expenses, we’re a blended about 1.75% management fee over ten years. So, at 2% for the first five years, and then steps down to 1.5% the following five years. That is all taken out of the total committed capital. If you add 2% over a ten year fund life, about 80% of the total capital committed by LPs goes directly into investments.

We’re hovering around $0.80 of every dollar gets put to work in investments. Now, a couple of reasons why LPs are okay with this. Like I said, finding great investment opportunities that they otherwise wouldn’t find and be able to vet, that’s why people invest in funds. They believe that partners in the fund have the ability to identify great deals.

And they’re willing to pay $0.80 on every dollar they invest, or $0.20 basically goes to the management company in order to find deals, in order to do detailed diligence, negotiate deals. Negotiating a deal is not as easy as you think, especially if you’re early in the round. And most importantly, portfolio maintenance.

Like I keep saying, working closely with portfolio companies is really important, especially at the early stages. LPs, are willing to give us $0.20 on every dollar in order to do that, over about ten years and large institutions could negotiate a lot of this and maybe put $0.90 of every dollar to work in investments.

But it’s typically around $0.80, a bit lower with some of the fund expenses.

Nick Moran
Some funds do initial investments out of the same fund as they’ll do follow-on investments. Other venture fund managers will raise separate funds. So they’ll do one fund that makes initial placements and they’ll do some sort of growth fund, or follow-on fund. If a fund is doing both initial and follow-on investments, can you talk about how much capital is used for the initial versus how much is reserved for follow-ons?

Jonathan Struhl
Typically, funds do not make follow-on investments in every single portfolio company. Now this is for a number of reasons. One is maybe valuation is too rich to be able to follow on. Maybe there’s not high enough conviction. Like I said, not every portfolio company will be a rock star.

And on those ones that you know are not doing as well, you essentially don’t follow on. And sometimes VCs don’t get an allocation. I’ve seen deals where seed investors work really closely with the portfolio company, and then they go on to raise a much larger series A and it’s a really hot deal.

And those VCs that have worked very closely with the company don’t get an allocation at all. There are things you can negotiate in the deal, but a lot of times with the really hot companies, that would happen. A couple other reasons why you wouldn’t follow on, and some of that has to do with liquidity.

So maybe the fund doesn’t have enough liquidity, and there’s a bunch of other factors. So, funds typically save between 40 to 60% of the total investable capital for follow on investments.

Nick Moran
I want to talk a little bit about who you’re raising from. So we’ve got institutional LPs, we’ve got retail LPs, can you talk about who the target LPs often are? And also, sort of a follow on to that, can you talk about how capital is called from those LPs that have made a commitment?

Jonathan Struhl
With a fund like ours, we call it emerging fund managers, first time fund managers. High net worth individuals are really important for us. These are guys and gals with $100 million plus on assets. They love investing in a emerging fund managers and early stage ventures, it’s part of diversification.

So there’s high net worth individual, which is a really important bucket. There’s family offices and multifamily offices and some of these high net worth individuals have an organization manage all their capital and they would invest in venture capital, basically give a slice of the allocation to venture capital. And then there’s institutions with large amounts of available capital, such as state and private pension funds.

There’s university financial endowments, foundations, insurance companies. And then there’s fund of funds, which is basically a pooled investment vehicle. Those are usually the LPs that every fund goes to now. The larger the fund, usually they go away from high net worth individuals and specifically target institutions. We’ll have a bunch of different institutions invest in a large fund.

If one institution ends up taking the entire fund, that’s an issue. It gives them a little too much in control, maybe with a little too much say in the fund, but there are a bunch of different types of LPs that you can have. Some are better, some are worse, but there is no shortage of capital out there.

Nick Moran
So what happens if a capital call is made and an LP either cannot or does not fulfill their commitment?

Jonathan Struhl
For us, and this is sort of standard in the industry. When an investor invests in a fund, they don’t invest all their capital at once. So, if I can make a million dollars to a venture capital fund, I don’t give you the full million dollars. It’s drawn down, usually on a yearly basis.

So how we’re set up is invest in our fund, we call 20% of the total capital immediately on the closing, and then we’ll usually have 20% capital call yearly. It’s tough to plan out because you want to stay opportunistic, but you also have to communicate to your investors when they will have to write a check to a venture fund.

So from what people think, you don’t have, if you raise a $20 million fund, you don’t have $20 million in the bank. It’s called strategically over a couple of years.

Nick Moran
And what happens if a capital call is made and an LP either cannot or does not fulfill their commitment?

Jonathan Struhl
Signing the subscription docs is important for this. It shows that the LP is an accredited investor and that they do have the liquidity to make an investment like this, but there are cases when LPs do not fulfill their commitments. Technically they’ll lose any participation in the profits, and it be distributed pro rata to the rest of the investors, but it really depends.

Nick Moran
Jonathan, can you talk about the average time to return for investors in LP’s, and if cash distributions are made prior to the close of the fund, and if so when are those distributions made?

Jonathan Struhl
Sure. So fund life is usually like I said, ten years, and two one year extensions. So over 12 years you have to return the capital. Now, smaller funds like to return capital as soon as possible, because fund managers would like to go on and raise another larger fund once they’re invested in the company, and they just sort of allocate their fund to follow on investments, and then go on and raise a new fund.

So they’d like to return capital as quickly as possible, in order for those LP’s to be comfortable participating in the next fund. Now, there’s tons of data talk about VC returns. I would look at Cambridge Associates. They have really great data on LP returns and expected return, but typically a home run would be four to five X, gross realize over a fund life.

But changes obviously different stages, after the VC invests, but the goal and nice goal will be four to five X.

Nick Moran
And then some of that cash would be returned during that 10 to 12 year period, whereas the majority is returned at the fund completion?

Jonathan Struhl
Well it depends. So we’re investing early stage. We hope for some sort of liquidity event from our portfolio companies, about five to seven years. Now, if we have a 10 year fund life, it’ll obviously be before the fund life is over. Like I said, early stage funds are looking for quicker returns.

After the 10 years, or 12 years if you do those two one year extensions, you would have to go out of way to liquidate some of these portfolio investments and return the capital to the LPs.

Nick Moran
Great, so now that we’ve gotten some of these mechanics out of the way, on to more of the fun stuff. So Jonathan, can you walk us through your personal experience and process of how you raised your fund, and your decision to raise a fund in the first place and how that process played out?

Jonathan Struhl
My partners and I, we manage the fund right now on a daily basis and one of them was my partner at an ad agency that I was running and our third is a really strong finance background, and very involved in the startup scene. So we were all doing a bunch of angel investments.

We were seeing some great deals. We would have these late night ad hoc investment meetings, where we would just go through deals, and develop our diligence process, and grow our network. Venture capital is pattern recognition at the end of the day. So the more deals you see, the better off you are, and the better you can make decisions.

We were all doing our own things, and I think venture capital was always something very interesting that the three of us wanted to get into, but we weren’t sure when the time was right. And angel investing was working out, we had a couple interesting exits and used that money in order to make new angel investments, and then one day we were just like [BLEEP], let’s raise the fund, and we decided to wind down what we were doing.

Ben, my partner and I were running a marketing agency which was pretty successful and we’re working great large clients, and Jeff, my third partner was running a consulting business that would work with startups. And we took everything we were doing from the investment side, so our angel investments, we had about eight really incredible angel investments that we rolled in to funds.

So between a year, a year and a half ago, we decided to wind down what we were doing and raise this fund, started with eight companies, added on where we could to make them size relative to a venture fund versus angel positions. And then spent about six months there after putting together everything from our vision to our fund docs, which we had a lot of fun doing, to growing our deal flow and our network, and refining our due diligence process.

More importantly we had vision of surrounding ourselves with really smart people, and being generous with the fund and the carriers specifically. So, for smaller fund like we are, we have about 17 people. A couple of them are higher level adviser’s, but we have about eight venture partners that are very involved in what we’re doing, all have a very specific skill set in the specific industries.

So as we were gearing up to raise this fund, we brought a bunch of really interesting individuals on board who shared in our vision. We add our eight great investments, and we’re really buttoned up as it pertains to our vision, our strategy, our fund docs and getting great deal flow and due diligence, and then we went out and raised.

It actually proved to have a great story, bunch of great people around us, and we successfully raised and it was interesting cuz we were raising with a portfolio. A lot of the funds, it’s really just a blind pool and you say invest in the managers, because we will find great deal and usually there’s a track record behind it.

But, knowing that we’re emerging fund managers, and we’ve been angels and mentors and advisers to startups for years. We never actually ran a fund before, so we thought raising money would be very tough and we worked hard and we made sure that we were as LP friendly as possible.

So raising the fund, we have about 14 portfolio companies right now. So we were actively making investments as we were fund raising, and that was really important to help us fund raise as well because our LP’s saw there was a tangibility to our fund. They saw what we were investing, and the fact that we had an angel, a track record, but not an actual fund track record.

Having a portfolio while raising was really important for us and made the process a lot easier.

Nick Moran
Really interesting so you took some of your winners on the angel side and offered those up as part of the fund, so LP would own sort of your equity positions in those investments?

Jonathan Struhl
Correct, and we transferred those positions and that cost. So essentially they would share on the upside, and that was something we did to just sweeten the deal as much as we could. Putting together the team, being as transparent as possible with our LP’s, and then the most important thing was having that portfolio and investors were like, these guys can see some great deal, and here’s proof to it.

Let me actually buy into those deals as well. So they were able to see in percentage of our fund actually being put to work before they invested, which was very simple from their due diligence perspective versus being at the past and the things that we’ve invested in versus now.

Understanding and being able to buy into this non-blind pool, there’s actually tangible assets and tangible investment in the fund.

Nick Moran
That’s brilliant. I’ve never even considered that. So how long was the fundraise process from start to final capital post?

Jonathan Struhl
Under a year. We were not a hundred percent focused on fund raising. We were making investments, and we were doing diligence on companies and we were working with portfolio companies, and we didn’t spend 100% of our time reaching out to LP and fund raising, but after we raised our first $5 million, we knew we had some.

First money in is really hard, especially for first time fund manager. So once we got that out of the way, it was sort of smooth sailing there. It’s funny because a lot of startups don’t think that funds have to go out and raise money. They don’t think it’s a hard process.

Venture capitalists get it, right? When it comes to sitting in front of a potential investor and sweating and having to pitch your soul, we had to do that to LPs, so we get it. Raising our first $5 million was really important to us and validating what we’re doing. We knew that we were on to something and we knew we had a great portfolio.

We knew we were seeing great deal flow on our team was excellent, but first $5 million that came into the door was important for us to just sort of catapult us into finish fundraising.

Nick Moran
Yeah, even though a limited percentage of startups and venture funds will be successful, I think a lot less startups end up achieving their goals than venture funds even. But I think the fund raising process on the VC side is much more challenging.

Jonathan Struhl

Nick Moran
Clearly you had a high-powered network. You had some great relationships with high net worth individuals. Can you talk a little bit about how you identified LPs and then how that courtship process worked?

Jonathan Struhl
Sure. The first chunk of our fund came from our immediate network, right? I’m not even talking about friends and family. I’m talking about people we worked with along the way from a business perspective. Then you exhaust networks and you move on to the next network and then you get a network once removed.

Though, you ask a friend to introduce you to another friend and we did a lot of that. A lot of it was introing from someone that is connected to the person and trust you, right? Those warm introductions are really important, especially for raising a fund. We didn’t do any cold outreach, we didn’t randomly email anyone, but what we did was we spent a lot of time with a lot of people.

Even though people or these potential LPs we knew weren’t gonna invest, we spent a lot of time talking to them and sharing our vision and our macro views on the world, which is really important and a lot of them said, it’s not for us for a number of reasons, here’s why.

But my friend who does X, Y and Z, it’s very interesting for them. Let me introduce you. So I think taking meetings with people that you know are aren’t gonna invest but are connected, is really important. Once you say to someone, I’m not fund raising from you, like I don’t need your money, I just wanna chat, those potentially can turn into the most lucrative meetings.

That’s something I’ve learned along the way. So we did a lot of that. But the standard raising from LP, basically it’s the same thing as VC investing in a startup, right? You get the the intro, hopefully it’s a warm intro of someone you trust, they do diligence, deep diligence, spent a lot of time with you, get your vision, meet your team, look at your portfolio, understand who are the guys and girls behind it, docs are exchanged and then some negotiation potentially, whether it’s management fee or carry, etc and then commitment.

And then they would essentially fund the first, it’s called 20% up front. And that was sort of the process that we follow.

Nick Moran
Yeah, it’s like if you want advice, you ask for money, and if you want money, you ask for advice.

Jonathan Struhl
[LAUGH] Love that.

Nick Moran
[LAUGH] So what were some of the common reasons why LP said no?

Jonathan Struhl
Some of these I learned, some of these I knew going into the meetings, but we met with them anyway. So some of it was diversification, right? So some of these larger LPs, whether it’s fund to funds, whether it’s institutions, they’re overextended in venture capital. Like I said, they allocate a small percentage of their total assets to venture capital.

So they’re potentially over-allocated in that space. I’ve seen a lot of that. A lot of times it’s been early stage investing is too risky for us and we don’t know what the future holds. Sometimes it’s a liquidity issue on the institution’s part, right? Just invested in X, Y, and Z, so liquidity could be an issue.

Timing is also an issue. But this one that I’m about to say is is an interesting one that I learned is smaller funds are potentially too small for institution. A large, large institution invests, let’s call it a minimum of $50 million into the deal. So if you have a $20 million dollar venture fund, it doesn’t make sense,

Nick Moran
Not gonna move the needle, right?

Jonathan Struhl
It’s not going to move the needle for them. That was a harsh reality of raising the smaller fund. It was going to these large institutions, and you’re sort of like, I’m about to get a sizable check from them. And then hearing that, look, honestly about what you guys are doing, but it’s too small.

Also, some investors don’t like investing in emerging fund managers. By emerging fund managers, it’s a nice way of saying first time fund managers. I disagree. I think emerging fund managers are more hungry, they work for the carry, they’re more generous when it comes to surrounding themselves with people, they’re more curious, they look at things with fresh eyes.

Those are some of the reasons I’ll be, say no, on top of a thousand other things that I’ve heard.

Nick Moran
When I was working for a conglomerate on the Yemeni side, we would often come across really compelling technologies, really disruptive innovation on the B to B side. But the companies were just too small to integrate, too small to justify the purchase price and then the cost of integration. So, unfortunately, the organization just wasn’t set up to be as active as I would have liked on the early stage venture side just not moving the needle.

Jonathan Struhl
And, last thing I’ll say there is, the reason why larger institutions like to invest in early stage funds is essentially it’s a feeder, right? We invest in seed stage companies, we find great deals early on, there’s a lot of uncertainty around those young companies. But if they invest in our fund or fund like us, we see those deals and we’re able to sort of feed them up the ladder to other funds and other institutions that are interested in investing in a later stage.

So that’s proven to be really valuable for us as investing in an early stage fund as a feeder.

Nick Moran
Almost like buying an option, right?

Jonathan Struhl

Nick Moran
So, was that the first major milestone? You mentioned that $5 million amount that you closed first. What was that first big win in the fundraising process?

Jonathan Struhl
Yeah, I think it was our first $5 million. The three of us, as Imagine partners, we looked around and we said, we’ve done everything we possibly could to make us an investable fund. That was going to do it and there was obviously uncertainty there. We believe in ourselves, we believe in, like I said, we had a portfolio while we were going out and raising.

But, proof is in the pudding and that first $5 million that we were able to raise really quickly, it’s validation. We believed in it, but that was validation and I guess that first money in is always the hardest, especially with a fund. So, I think that big hurdle that we had to step over was that first $5 million to raise, and then the rest of it, like I said, no one wants to be the first money in, so last money in is always easiest.

Nick Moran
I take it that first five was across an array of LPs, it wasn’t just one?

Jonathan Struhl
Yeah, it was a couple different LPs. I mean, we have about 20 LPs right now, so we’re doing great. Originally what we were thinking about, because when you go and raise a fund you think, okay, how many LPs am I gonna have because that has some sort of implication on docs.

And if you have over 99 LPs and you have to set up sorta something else and it’s another expense and it’s sort of a whole headache. So we were thinking, are we gonna have 99 LPs? How’s this gonna work? And luckily we kept that number really low.

Nick Moran
So you’ve already given us some great strategies on the fundraise process, but do you have any other advice, tips, or insights for somebody considering raising their own fund?

Jonathan Struhl
A couple I might cover, but, I’ll run through them again. If you’re an emerging fund manager, don’t raise a blind pool. Raise a fund with an established portfolio. It gives a potential LP an idea for the types of investments you’ll be able to find down the road, and LPs can buy into something tangible.

That’s really important, especially if you don’t have a track record. I would suggest investing as angels, or as an angel, and then rolling them into the fund at the original cost basis. It shows a lot about you and a lot about your strategy to the LPs. GP commitment’s really important, as well.

It shows that you have skin in the game. If you’re raising a fund and you’re gonna collect management fees, you’re gonna get carry hopefully, having skin in the game as an investor yourself into that fund shows that you believe in what you’re doing and that you’re directly aligned. So make sure you have as much of a GP commitment as possible.

Another thing which is really important for emerging fund managers is building a strong and experienced team around you. We look at the fund and everything we do has three pillars. There’s deal flow, there’s diligence, and portfolio maintenance. Like I said, 17 individuals for a small fund is a pretty large number, but surrounding yourselves with smart people that can help you with deal flow, diligence, and portfolio support.

By portfolio support, I mean working very closely with the company, he’s really important. And as LPs look to invest in venture capitalists, they want to see that they have a network, that their network believes in them, and that their team can then go and help their portfolio. One large client or something to do with a product or pivot or anything early stage company does can make or break the company.

And us having a large team is really important for being able to send these specific SWAT teams in to work with our portfolio companies. And another thing is get a great legal team. Especially if you’re an emerging fund manager, a lot of this stuff is complicated. You wanna make sure that you’re as LP friendly as possible, especially if these larger institutions are looking at investing in your fund.

You need to make sure that your Docs are good. You have great legal people behind you. And that as you continue to move forward and give out term sheets, and negotiate deals that you have a great legal presence and try to align yourself as directly with legal team as possible.

Partner at a large law firm is actually one of our advisors in the fund as well, which has proven to be valuable because he can really help us on a personal level. Another thing is develop a macro views of the world. Like three to five, ten to twenty years, what do you think the world’s going to be, and then invest accordingly.

And communicate that to your LPs. Start small, manage expectations, don’t [BLEEP]. Potentially if you raise your first fund, the LPs will stay with you for fund two and fund three. Yes, shoot for the moon, it’s a good thing, but manage expectations while you’re doing it. Have a strong and established due diligence process.

Being able to show some examples of a due diligence process goes a really long way. So as we were sitting with potential investors, we say, do you want to see some examples of the diligence we do on companies? And they were actually portfolio companies. Providing those Docs have really helped us.

I can go on and on about different pieces of advice that I give, but I think those are really the main points for helping you to raise an emerging early stage, seed stage, micro VC fund.

Nick Moran
So, Jonathan, we’ve talked a lot about what you’re doing, how you raised the fund, the funds’ focus. But can you talk, maybe specifically about what you’re currently most focused on?

Jonathan Struhl
Sure, it’s almost focused on, like I said, VR and AR is really important to me, but used cases for VR are outside of consumer facing applications like gaming and entertainment, right? Exploring how you can use virtual reality, augmented reality in the business world. It’s a frontier that I’m excited to be able to explore.

Connected devices, Internet of things, it’s no surprise that I’m interested in it. Internet of things, connected devices play into our core thesis of digital efficiencies, right? We look for entrepreneurs that are leveraging digital hardware or software to make consumer business life more efficient. It’s less about the hardware that I’m excited now but it’s more than software and security behind those connected devices.

I see a big shift of large corporations gobbling up these smaller connected device companies like Google, they would nest. You’ll start to see a lot more of that with these large corporations which are trying to own specific places like the Smart home. Google’s trying to own the smart home.

Cisco would try to own the smart business. I see a lot of that happening. That’s a really interesting opportunity that we’re focusing on. There’s so much being created right now content, apps, bazillion startups. The world has become this repository of things, particularly the Internet. I think there’s a big opportunity in what I call COE, right?

So IoT is Internet of things. COE, curation of everything. There’s so much [BLEEP] out there that I think creating companies to sort through the clutter is a big opportunity. That’s why I love companies like Product Hunt. Product Hunt has really created essentially a Google for startups. Being able to search, and sift through all the noise, and find some great startups is really important.

And I think that curation model can be applied to a bunch of different industries. Really, it’s just a light-weight curation solution, but we need it. I mean the more content being created or the more companies being started, a lot of them are the same. A lot of them trying to tackle the same problem.

Like how does the consumer find anything nowadays? They’re just being bombarded with stuff and I think the federation of everything is is a really interesting thing, I guess you would call it that we’re focused on.

Nick Moran
If we could address any topic inventor, what topic do you think should be addressed and who would you like to hear speak about it?

Jonathan Struhl
I get this question a lot from some of our startups. It’s really about raising money from large corporations. I’d love to understand and hear from founders, some of their experiences about raising from a large corporation that is not typically an investor. It could be structured a bunch of different ways.

If you are a media company, a startup media company, and getting an investment, a strategic investment, from a larger media company, great. But if it’s not structured right, it can be a terrible experience, sends out bad signals especially if they don’t invest in more and don’t end up acquiring you.

You can ask for certain exclusivity that could end up burning you with the rest of the industry. I’d love to hear founders talk about their experience in raising money from large corporations. As some of my portfolio companies are raising A and B rounds, they’re talking about corporations who could potentially invest as a strategic and.

Nick Moran

Jonathan Struhl
Well, it sounds great, it needs to be structured right and I’d love to hear entrepreneurs who have gone through it, talk about their experience both positive and negative. I think you learn from negative more than you do from the positive, so I want to hear that.

Nick Moran
Jonathan, what’s the best way for listeners to connect with you?

Jonathan Struhl
Probably through Twitter, jstruhl on Twitter, J-S-T-R-U-H-L. You can dm me, pm me, I’m pretty active, so I think that’s the best way to get in touch with me.

Nick Moran
Well, thanks so much for sharing all your insights on raising a venture fund, and what your focus is over at Indicator Ventures. I’ve learned a lot today, and really appreciate the time, Jonathan.

Jonathan Struhl
Nick, I appreciate the time. Thanks for having me. I look forward to hearing many more podcasts coming out of the floor action.

Nick Moran
[LAUGH] I’ll do my best.

Jonathan Struhl