So you want to become a venture capitalist or an angel investor? Awesome! Funding startups can be an exciting and rewarding career. But raising your own Fund is no easy feat.

This comprehensive guide breaks down the process into clear steps for first-time fund managers. Whether you’re a seasoned entrepreneur or just starting out, you’ll gain insight into attracting limited partners, building a portfolio, and managing a fund like a pro.

Let’s get started!

Why Raise a VC or Angel Fund?

Before we dive in, it helps to understand the appeal of running an Investment fund. Here are some of the top reasons aspiring VCs and angels take the leap:

Drive Innovation & Growth

Investing allows you to support entrepreneurs, new technologies, and economic growth. It’s fulfilling to play a role in the success of disruptive companies.

Build an Enduring Institution

A fund can become an entity that outlives any single investment. With a stellar track record, fundraising gets easier over time as your brand becomes known.

Make Money from Exits

While risky, backing startups can provide fantastic returns if you pick winners. Profit shares from acquisitions and IPOs are the pot of gold.

Gain Influence

VCs get access to the best deals and newest startups. You’ll rub shoulders with tomorrow’s business titans.

Be Your Own Boss

As a general partner, you call the shots on investments and strategy. If you love analyzing companies, it’s a dream job.

Of course, the path isn’t always rosy. Failures and downturns test the savviest Investors. But the rewards tend to make up for the rollercoaster ride.

Building Blocks of an Investment Fund

Alright, time for Venture Capital 101. Let’s quickly review the core components of a fund.

General Partners (GPs)

The fund managers who source deals, decide on investments, and support portfolio companies. Compensation comes from the fund’s profits.

Limited Partners (LPs)

The institutions and high-net-worth individuals who contribute capital to the fund. They are passive investors without much control.

Management Fees

An annual percentage fee (1-2%) on assets under management. This compensates GPs for operating costs.

Carried Interest

A share of the fund’s profit (usually 20%) goes to the GPs as an incentive for good performance.

Investment Period

The period where capital can be actively deployed into new investments. Typically 3-5 years.

Life of the Fund

The total duration a fund operates is usually 10+ years. Needed to manage existing investments until exit.

Source of Funds (SOF)

The origin of capital from LPs often dictates allowable investments. Important for compliance.

Investment Thesis

The strategy for what to invest in and why it will succeed. This guides investment decisions.

Step 1: Create a Compelling Fund Strategy

The first step is crafting an investment thesis and fund strategy that will entice investors (aka LPs). This is your vision for generating returns.

Consider these key questions:

• What will you invest in? Early stage? Growth stage? Specific sectors or geographies?
• How big will your fund be? Typical first funds are $25 million to $100 million.
• What criteria and processes will you use to make investment decisions?
• How involved will you be with portfolio companies? Some VCs are highly hands-on, while others take a passive role.
• What are your unique abilities to source top deals and add value?
• Why will your strategy succeed? Market trends? Experience? Proprietary access and relationships?

The strategy should align with your skills, interests, and background. Leaning on your strengths gives you the confidence to hit the ground running.

Avoid overly broad strategies or trying to mimic big-name funds. Offer something specialized that fills a need for investors seeking exposure to a niche.

Think ahead to marketing materials and how you’ll succinctly convey your value-add. A compelling story will stick in investors’ minds when it’s time to fundraise.

Step 2: Build an Investment Track Record

Nothing convinces investors to hand you money like demonstrating you can pick winners.

Before raising a fund, strive to build an investment track record in any way possible:

• Invest your own money: Self-fund angel deals through an LLC.
• Join an existing VC firm: Become a junior team member and learn the ropes.
• Back companies as an advisor: Take advisor shares or options in startups.
• Start a rolling fund: Raise a small Proof-of-Concept (PoC) fund on platforms like AngelList.
• Network with founders: Refer deals you can’t personally fund to firms you know. Get compensation if the deal closes.
• Create a value-add: Start an incubator, shared services platform, or community where you identify promising companies.

Even a handful of successful exits can go a long way. But be prepared to show the performance data and have operators vouch for your contribution.

Step 3: Assemble a Strong Team

Venture capital is very much a “team sport.” Assembling the right partners, analysts, associates, and support staff is crucial before launching a fund.

Ideally, find teammates with complementary skills and networks:

• Sourcing: Partners who can spot promising startups and convince them to take your fund’s money.
• Diligence: Team members are experienced in assessing founders, markets, financials, risks, and deal terms.
• Value-add: Folks who can help portfolio companies recruit, strategize, fundraise, etc.
• Operations: Finance, accounting, legal, and back-office pros to keep the fund running smoothly.
• Domain expertise: If targeting a specific sector, find investment professionals from that industry.

Having diversity across gender, ethnicity, age, and geography also expands your access to deals and ability to support different founders.

Finally, integrity and trust are must-haves. Partners will depend on each other for years to come.

Step 4: Structure Your Economics

Ah, time for the fun part…figuring out how to make money!

As we covered earlier, VC fund compensation has two components:

Management Fees

This is a percentage fee on assets under management (typically 2% annually). So if you raise a $100 million fund, you’d earn $2 million per year in management fees over the life of the fund.

Management fees cover operating costs like staff payroll, office space, travel, legal, marketing, technology, and other expenses.

The fee declines later in the fund’s life as capital gets returned to investors from exits.

Carried Interest

Also called “carry,” this represents the share of overall fund profits that goes to the general partners.

Typical carry is 20%, meaning GPs get 20% of the gains on investments. With a 2&20 structure, GPs would receive 2% in management fees and 20% of profits.

Carry is meant to align incentives between GPs and LPs. You eat what you kill.

Carried interest only starts materializing once investments reach liquidity from acquisitions or IPOs. So it takes patience to see carry payoffs down the road.

Step 5: Raise Capital from Investors

Alright…you’ve strategized, team-built, and gotten the fun parts figured out.

Time for the real test – convincing investors to sign on! This usually takes 12-18 months and tons of relationship building.

Create Marketing Materials

Start by developing materials that succinctly convey your strategy, value-add, backgrounds, track record, and team. Here are some key items:

• One pager teaser
• 5-10 slide pitch deck
• 2-3 page information memorandum
• Biography booklet on team members

Make sure everything is polished, detailed, and visual. This is investors’ first impression of your professionalism.

Build a Target Investor List

Research and build a list of 200-300 investor prospects. Typical LPs include:

• Endowments (college, foundations, nonprofits)
• Pensions (public, corporate, unions)
• Fund of funds
• Sovereign wealth funds
• Family offices
• High-net-worth individuals

Look for investors already backing similar funds or interested in your strategy based on mandates. Connections via your network can provide warm introductions.

Network Extensively

Success comes from systematically working your list and leveraging contacts to schedule meetings. Attend conferences and events to build relationships.

Cold emails seldom work. You need referrals to get on an LP’s radar and calendar. The sales process takes patience and persistence.

Give Informational Pitches

Early meetings are simply “informational” pitches to educate investors on your strategy and experience. Don’t explicitly fundraise yet.

Gauge interest levels, improve your materials based on feedback, and keep investors updated on your progress.

Build FOMO

When approximately 20-40% of your target capital is committed from lead investors, go back to your top prospects for official close meetings.

Momentum and FOMO (fear of missing out) make it easier to motivate investors to commit the remaining capital they need to hit their fund target.

Handle Objections

Expect detailed due diligence questions on your team, experience, investing criteria, pipeline, economics, references, etc.

Investors also look for red flags like inflated returns, poor ethics, misaligned incentives, lack of transparency, etc.

Be ready to clarify any objections directly and provide data where you can. Conviction and integrity are critical.

Close Commitments

If everything goes well, you’ll get a yes! Move quickly to complete investment paperwork before momentum stalls.

Agree on terms like fees, carry, reserves, default provisions, no-fault divorce clauses, successor GPs, and other details.

Then the real work begins – putting the capital to work and delivering returns to your new investors!

Step 6: Make Investments

Now for the fun part – it’s time to invest! Here is the typical process:

Deal Sourcing

Having a strong deal flow is crucial – the more quality companies to filter, the better. Tap into your team’s networks and relationships to find prospects. Other sources include:

• Founders and entrepreneurs
• Incubators and accelerators
• Angel groups and syndicates
• Lawyers and accountants
• Commercial bankers
• Former colleagues and bosses
• Conferences and events

Initial Pitch Decks

Startups will send you teaser decks and executive summaries to get your interest. Sign NDAs as needed to receive propriety info.

Preliminary Diligence

If compelling at first glance, move forward with preliminary diligence:

• Evaluate founders (backgrounds, experience, drive)
• Research market potential
• Assess product/technology
• Review metrics and financials
• Talk to references (customers, former co-workers, etc.)

Investment Memorandums

For the most promising opportunities, prepare memos for your team analyzing the pros/cons, risks, and potential returns.

These help align your partnership on priorities and determine the next steps.

Term Sheets

Term sheets outline proposed deal terms if everything checks out upon further diligence. They include:

• Investment amount, structure (equity, debt)
• Valuation cap
• Liquidation preferences
• Board seats
• Rights/protections
• Default triggers
• Vesting schedules

Term sheets provide foundations for final agreements if (big if) diligence goes well.

Due Diligence

From term sheet to closed deal may take 30-90 days for thorough reviews:

• Commercial + legal diligence confirming IP, contracts, and obligations.
• Customer calls verifying product-market fit claims
• Background checks on founders and management
• Financial records review
• In-person site visits as practical

Closing documentation

You’re ready to wire funds after formal agreements are signed:

• Stock Purchase Agreement
• Restated Articles of Incorporation
• Amended Bylaws
• Shareholder and voting agreements
• ROFR, co-sale agreements
• Employment agreements
• Consulting agreements

Portfolio Support

Your work isn’t done after closing! Add value via:

• Strategic guidance
• Management team recruitment
• Follow-on funding
• IPO and M&A guidance
• Ongoing mentorship

This support can maximize outcomes for founders…and your fund’s returns.

Step 7: Manage Your Fund

With a portfolio of private companies, ongoing GP duties include:

Reporting to Investors

Provide quarterly or annual updates to LPs on portfolio health, major events, reserve status, and performance to date. Transparency is key.

Supporting Exits

Help time and structure liquidity events like acquisitions and IPOs to deliver returns. Guide companies on banker selection, prospectuses, and more.

Handling Issues

Address challenges facing portfolio companies like leadership changes, growth stalls, cultural problems, down rounds, or possible insolvency.

Raising Follow-On Funds

If all goes well, launch another larger fund after putting your initial capital to work! Repeat the fundraising process with your new track record.

Distributing Returns

Return proceeds to LPs as exits occur. Waterfall distribution schedules protect LPs before carry payments to GPs.

Winding Down

In a fund’s later years, focus on supporting existing investments until exit rather than new deals. Manage reserves to cover potential liabilities.

Related Posts

• 9 reasons why raising capital for a VC fund is harder than raising capital for a startup?
• Adventure Capitalist: Embracing Risk and Reward
• How to Start Your Own VC Firm?

Key Takeaways

Launching a venture fund poses challenges, but can be tremendously fulfilling. If you have the bug to become a VC or angel investor, remember these lessons:

• Create a differentiated strategy: Pick an achievable niche and articulate your edge clearly.
• Build a track record first: Earn trust by proving you can spot winners.
• Assemble an all-star team: Complementary skills, networks, and experience stack odds of success.
• Structure fund economics thoughtfully: Balance management fees and carry to align incentives.
• Fundraise patiently: Allow 12-18 months to build relationships and court investors.
• Make disciplined investments: Have a sound process for sourcing, diligence, and portfolio support.
• Provide excellent investor stewardship: Communicate often and transparently to build loyalty.

With a strategic mindset, patience, and strong relationships, you can turn your dream of running an investment fund into reality. The journey isn’t easy, but helping build the next generation of iconic companies makes it worthwhile.

Good luck in your quest to become a top VC or angel investor! Please reach out if I can ever be a helpful resource.

The post How to Raise a Venture Capital Fund? A Beginner’s Guide for Aspiring VCs & Angel Investors appeared first on Tactyqal.