Start Small

A little more background on my recent tweets, see below.

I recently had a conversation with a VC who is in the process of raising his 1st fund.  My suggestion was to start small, acknowledging that management fees would likely be minimal or close to nothing.  The benefit of starting small is that the fundraising process will likely be slightly shorter and slightly easier (although it is never SHORT or EASY).  Institutional LPs want to see how you can manage a fund, so that faster you get started and show a track record, the faster you can have a chance of raising from those big LPs.  Many funds have shown the ability to start small and then raise significantly larger funds in a handful of years.

I also threw out the idea of…hold you breath…not charging any management fees on the first fund (i.e. no salary) but with a pre-negotiated amount of draw to cover non-salary costs.  I know this is shocker for some, but several managers have done this.  The trick obviously is how do you pay your bills with no salary?  Some had savings that carried them over for a few years, some had a significant other that helped them cover their living costs and some did consulting on the side.  Hard to pull off, but can make the fundraising process even faster if you are looking to optimize for speed.

Related, here is a post by a Charlie O’Donnell of Brooklyn Bridge Ventures, who raised an inaugural $8.3M fund and outlines the economics of his fund  http://www.thisisgoingtobebig.com/blog/2014/5/12/the-economics-of-a-small-vc-fund.html

Also a post by Notation Capital, which raised a sub $10M inaugural fund and how they capped their fees https://medium.com/@NotationCapital/a-million-dollars-in-fees-762009db0cc8#.uh0xauv93

 

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