Raising your first venture fund

Based on our experience raising funds over the last ten years, here are a few tips for budding new VCs.

Figure Image

I have been raising early-stage venture capital since 2013. It is a process optimised towards people who are patient, creative, entrepreneurial and genuinely passionate about investing in exceptional founders.

We closed our most recent fund at the end of last year, which was oversubscribed. Sure, some luck and serendipitous moments helped us along the way, but 95% of the outcome was determined by hard work, commitment and relentless perseverance to achieve a goal.

As I made clear when I first started Hillfarrance Venture Capital, I am committed to growing the volume and depth of venture capital talent in New Zealand. We are a small but growing market, and we have the chance to create some of the finest VCs in the world. To this end, I am sharing a few notes and scribbles on raising venture funds I have captured throughout my career.

Don’t forget your family and your well-being.

I will start by acknowledging that our latest fund took over two and a half years to raise, more than three thousand meetings and a marketing budget of over $100,000. This all pales compared to the time I could have lost with my family if I didn’t plan it well. 

It is elementary to fall into a pattern of going to every networking event and paying to attend every family office seminar you can find. I assure you that the ROI on your time at most of these events will be nearly nil. 

My strength and resilience are sourced from my time with my family. During the raise process, I carefully managed my time not to compromise bedtime stories and date nights and to maximise my resource during the day. Sure, there will be dinners you host or educational seminars you run, but I recommend prioritising ROI and quality over volume. 

Raising a fund is challenging and can take its toll on your well-being if you don’t manage it well and be proactive. Don’t forget to love yourself a bit through the process. You will become the most considerable risk for your Fund if you burn out.

Fail fast and pivot

Does this sound familiar? If you have read The Lean Startup, you might remember this philosophy etched in many startup entrepreneurs' minds. This is also highly relevant to would-be VC fund managers who decide to innovate in our asset class.

We must keep pushing the boundaries of the venture capital offering. We are no strangers to trying new things, but we also allow time to test and understand the market appetite for our ideas and prototypes. If you are an innovative VC, then be ruthless with your product roadmap and don’t linger on stuff that isn’t resonating with your target market.

Remember, every new investment is a significant new page in your deck.

One of the best pieces of advice I received early in my career is to ensure you have enough capital to start investing as soon as you open the fund.

Your initial first-close pitch deck, just like a startup, will be focused on what makes you different as a fund manager but also to show that you can demonstrate your USP in real-time. This means convincing exceptional entrepreneurs to accept your capital and then working your proverbial bum off to be the best investor on the cap table. This could manifest through significant customer intros that convert into revenue; introducing talent from your network who turn into high-performing hires; syndicating the round with other VCs; or just sharing your knowledge and unique experiences with the founder(s) to their benefit. 

As a quick FYI, any good VC should be doing this as par for the course. 

The outcome of this hard work will be some juicy slides in the deck that illustrate your edge and why LPs should choose you over the plethora of other fund managers who are also raising. 

But don’t forget your first four investments will define the first fund.

As a semi-footnote to the last point, you should not underestimate the importance of your first four to five portfolio companies. They will define your thesis, your edge, your deal flow sourcing capabilities, and your service platform's power to founders. Our first investments were across two of our fund focus areas and also into exceptionally high-performing entrepreneurs who are a delight to work with.

We launched Fund I at the beginning of the global pandemic, so we had a delayed start to capital deployment, but we still hit our first-year investment cadence. It meant getting used to completing due diligence almost exclusively through Zoom and changing a mindset or two, but it worked in the end.

If you want to do this right, start slow in your first year with three to four portfolio companies and preserve your dry powder.

Speaking of cadence, I can’t recommend highly enough the need to pace yourself in the first twelve to eighteen months of your fund’s ten-year lifecycle. For some, deploying as much capital as possible into what you think are the best startups since sliced bread is very tempting. Just know that things change rapidly on the frontiers of tech, and the hot software tool of 2020 might now be obsolete due to not finding product market fit. Take a breath and remember that there will always be other exciting opportunities just around the corner.

Also, don’t be surprised if your first cheques from your Fund’s first close are smaller than you want. Firstly, make sure you have a budget for the LP and plan out your investment schedule based on your current committed capital and what you hope to achieve by the end of the final close.

Secondly, know that if you nail your first set of investments, it will be easier to raise more LP capital, and your initial cheque size will likely triple. 

Stay focused on serving your customers as well as raising the fund.

At the root of any successful business is a tight focus on exceeding the expectations of its customers. Venture capital is no different. Our primary customers are our founders and Limited Partners, and we never stop trying to delight them.

Several first-time fund managers have become so focused on their capital raise that they lose sight of delivering what their customers expect and deserve. You need to do both while building a Fund.

Service excellence must be in symbiosis with your ability to raise capital. If it falls out of sync, your chances of closing a decent fund are significantly diminished. 

Be unique and build an aspirational brand.

The brand of a VC firm has moved beyond the need to name it after a mountain, a fast-moving animal, a tree or a chemical process. The time for VC brands that speak volumes about what the firm stands for and its ethics is nigh. Our company’s brand is built upon a tight values framework that we all live day-in-day-out.

If you are raising a fund, spend some time with yourself, your team, people from your thesis focus area and potential LPs to define your brand proposition and ultimately fold the outcomes into your naming strategy. 

Thankfully, the trend of removing a vowel and creating a startup brand is reaching its end, and VC firms of the future should mirror it. Engage an excellent graphic designer and build a name that founders want to wear and shout about in the market - it will eventually pay endless dividends. 

Choose the best advisors and service partners.

When you announce you are raising a fund, you will likely be approached by many potential service providers who want to help you. I recommend taking your time to get to know the people behind these organisations and using those data points to make a decision. 

If you have the backing of an excellent team of partners that believe in you and you in them, half your battle will be won. We have an exceptional array of advisors in the legal, accounting and coaching space, and I can’t thank them enough for their hard work and belief in us. 

Bottom line, I wouldn’t recommend going for the biggest name advisors or the ones that sponsor the most events. Spend time getting to know the partners you will be working with and make an informed decision. 

Allocate your marketing budget wisely.

Unless you are blessed with oodles of personal cash (I was not when I started in this field), raising capital will take time and carry a pretty chunky coat of acquisition. 

Good websites, branding, travel and entertainment, event attendance and sponsorship will consume your fund marketing budget faster than you can say “a 10x return”. 

My advice in this regard is to over-budget for self-published marketing, personally hosted events, website development and T & E. In the same vein, I recommend under-allocating to event sponsorships and attendance. Being a logo at the bottom left of a screen of attending an event that sells you on “hundreds of family offices in attendance” is essentially a waste of money. As someone who has tried the latter initiatives, I can assure you that the ROI is mainly at the opposing end of the scale. 

It is slower and harder to host your own events, write content and head out to meet people in person but doesn’t underestimate its importance. Venture capital is a people business; I believe good people are not swayed by glossiness. They become great contacts through consistent, stimulating and genuine engagement.

Final thoughts.

In summary, I hope these insights illustrate why perseverance, creativity, passion, entrepreneurship, and hard work are crucial to building a successful venture capital firm.

With my hand on my heart, I can happily confirm being a VC is the best job on the planet, and I love every day of my career (even the tough ones). The hard graft is work pursuing if you think you are cut out for this life.