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Today, it’s no longer sufficient to be just another stage and sector-specific fund. The venture landscape is becoming increasingly more saturated, and funds—both old and new—are finding it harder to differentiate themselves. For new fund managers, this provides a unique challenge for fundraising in a market ripe with both a well-solidified old guard and a rapidly expanding new generation.
For new funds to have a successful fundraise, emerging GPs (general partners) need to be critically thoughtful about how they can differentiate from the rest of the market. In my work of helping fund managers make their funds more appealing through branding and storytelling, I’ve homed in on some key components below to help emerging funds stand out.
By putting these foundational pieces together, fund managers can be targeted and find the most success with their fundraising approach. While these components prove to be the core aspects of any emerging fund, the fundraise itself can only be as good as how its manager communicates it.
How does your fund specialize in the four tenets of venture investing?
Broadly, the job of a GP consists of four distinct functions: sourcing, picking, winning and supporting. As a first-time fund manager, your strategy along these four functions determines both how challenging your fundraising experience will be and how successful your first fund will likely be.
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• Sourcing: Through what means do you get startups in the door, preferably before others get to them?
• Picking: How do you make decisions on what startups to spend your time with or try to invest in?
• Winning: What do you do to convince founders to take your money and work with you over many other potential investors?
• Supporting: How do you help your new portfolio founder succeed and bring their company to hyper-scale?
Exercise
Take a few moments to reflect on the four tenets for your fund. Analyze your core advantages or superpowers and determine if that helps with your sourcing, picking, winning or supporting. While every fund needs to have good answers for all of these functions, it is more likely than not that only one or two will be your true differentiators to focus on.
What types of LPs do you want to raise from?
GPs have to be purposeful in constructing their LP (limited partner) audience. LPs can range from high net worth individuals (HNWIs) to large institutional investors with billions in AUM (assets under management). Every LP has different investment theses, risk tolerances, investment strategies and goals when investing in funds. So you can imagine that trying to corral every one of these different LPs can become a logistical nightmare. So where do you start?
The first task at hand is determining which types of LPs provide the right fit for your fund. The goal here is to tailor your pitch so it’s easy to comprehend and advocate for your fund strategy and its unique attributes. Taking feedback from those who aren’t going to invest in the fund can lead fund managers astray, broadening the deck’s audience and making it less impactful.
While every investment vehicle is different, some LPs share similar characteristics:
• HNWIs and family offices that invest in startups or have industry expertise provide the most flexible form of capital, as they are typically not restrained by traditional investing practices.
• Large VCs and fund of funds commonly diversify their funds by investing in smaller, emerging/specialized funds, providing them with an early line-of-sight into top startups. Occasionally, these funds can receive pro-rata allocation for direct investments in the later stages of the companies their funds invest in.
• Institutions (e.g., large corporations, endowments, pensions funds) can provide larger check sizes and can anchor a fund, but their investing methods are usually more traditional and data/thesis-based, requiring due diligence.
Given the nuances of every investor, it’s vital to have friendly conversations with the right LPs to identify their goals and ensure there is a strong fit with a mutual understanding of the road ahead.
Exercise
Take some time to introspect on your core LP values and identify the audience group that has the highest likelihood of investing in your company.
What you care about:
• Is speed and flexibility or size and due diligence more important?
• Is it necessary for investment philosophy to be shared and aligned?
• Is sector expertise crucial?
• Is it necessary to partner with an LP that has invested in VC before?
What they care about:
• Team
• Investment strategy
• Sector
• Stage
• Financial returns
• Diversity
• Advisors
• Co-investors
• Proven track record
• Mission
Determining these factors can also help streamline your LP engagements and interactions and avoid curveballs. Lastly, consider selecting value-add LPs focused on building a long-term relationship that can help drive investments for future fundraises. By measuring LPs on trust level, value-add components (BD, M&A, recruiting, financial support, etc.), as well as likelihood to invest in the following fund, GPs can create a diverse and supportive LP base.
Everyone wants a good story.
A narrative or story is crucial in tying these building blocks together and delivering a compelling argument as to why a fund is a right fit for a potential LP as well as a founder seeking investment. Commonly, these fund narratives are communicated through pitch decks, memos and websites that provide a holistic view of these fund attributes, fund manager bios and investment theses. GPs and emerging fund managers use their pitch deck to bring investors into their world and unite over a shared experience or goal throughout their journey.
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Author: Albert Dong, Forbes Councils Member
