The technical part of fund building is shrouded in mystery, but the reality is with a bit of Googling, studying and perseverance it isn’t that difficult. There are a few resources I found invaluable which I’ll share in the relevant sections below. If you do go and build a fund, you’ll need a lawyer anyway for all the legal parts, but having a good grasp of the technicals is a must. Plus its a good idea anyway if you’re a founder to understand the parts of a term sheet to ensure you’re not being screwed over – something that happens far more often than not.
3. How much money do you need for you fund?
The all important question – and one that has a number of variables including:
- What stage are you investing in
- How many investments do you intend to make (and over what timescale)
- How much each investment would be
- How long will the entire fund last – i.e. when do you expect to divest out the entire portfolio.
- Allowing for follow-on
This is really only a starter list – the other important factor is what you do after the first Fund, what are you looking to do for future Funds. Next warning – you need to think long term (10+ years) yet be prepared to throw it all out of the window at a moments notice. I went through many phases of revising the numbers (for seed), from €3mln up to €10mln. And this was despite my attempts to wanting to keep it small, it just adds up.
Don’t forget the management fees too – 2% is common, though I had thought of doing a fixed €1mln over the fund life – seems a lot but add up the 2% over 10 years. And this is another warning – making money out of a first fund is really tight, margins are very thin. Again think about tying in to the longer vision and making money in Fund 2/3.
4. How and where to raise money
Contacts seems like the obvious answer but lets be more nuanced. Raising money is really about the confidence people have in you to execute the strategy. Who are the most likely people to believe in you – friends and family. So its worth starting there, of course there is an obvious danger, what if it all goes wrong? So be wary!
From there on, it probably is a lot to do with contacts and networking – finding the right parties who share your vision and possibly a bit of relationship building. Also remember you want to see if they are also thinking long term and would be interested in Fund 2/3. Next warning – managing your investors or LPs (Limited Partners) is a time consuming but necessary activity. Learning about your LPs motivations is so important. Have a listen to this series of podcasts by Notation Capital focusing on LPs.
5. Term sheets and technicalities
Best advice is to read Venture Deals by Brad Feld and also the resources on seedsummit.org. It may seem daunting but a lot of the stuff is quite standardised. My general thoughts at the end of the learning process is keep things simple and lightweight. Don’t get too creative! Oh one more thing- a term sheet isn’t technically legally binding, however it is a form of intent and founders shouldn’t try and play silly games with lawyers after. Get things sorted out before the lawyers finalise things.
6. Due diligence and deal flow
As we discussed last week – one of the things that can make you stand out is your deal flow – where you will source your deals. Deal flow is important because when you are executing/investing in startups your due diligence is pretty thin. You are buying into the vision and the faith you have in the team to execute this. Thus you need to trust the sources you meet/find startups.
This limited due diligence made me uncomfortable – I genuinely thought there would be more involved. And it puts into light how what is important if you do raise seed money – vision and trust.
7. So where did it go wrong?
I guess a more reasonable way to put it is why I didn’t pursue things further. One thing I haven’t talked about in great depth is people. People as for everything are crucial and I couldn’t find the right people to worth with. The big issue is everyone is motivated by their own priorities and finding people that aligned with what I wanted just wasn’t possible.
Secondly the number of warning signs concerned me – just look at what I’ve highlighted over these posts! Thirdly, I didn’t feel now was the time to take on such a venture. The commitment factor running into years played into that as well my inexperience. I wanted to have more experience in startups – maybe even start one up myself before looking into a Fund.
However the process was certainly worth it – lots of things I can use for future startups. I’ll recount some thoughts on working with a few startups next time. For now I’d love to hear your comments/thoughts on any experiences you have on starting a Fund!