How does an experienced VC get a new venture fund off the ground? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.
The pithy answer is that to get a new firm off the ground, a venture capitalist (new or experienced) has to raise the capital to be in a position to invest. But I can get a bit more specific. For an experienced venture investor, here are the key steps:
- #1 look at your track record with an honest eye and figure out if it is strong enough to raise a new fund. Key metrics are TVPI (Total Value to Paid In Capital) which should be at least 3.0x and DPI (Distributed to Paid In capital) which should be at least 2.0x. Many younger investors might have gaudy TVPI statistics based on one or two key mark ups. Limited Partners will often wonder if those unrealized gains are supportable (especially in today's environment). They will also ask if the gains are indicative of the ability to deliver returns repeatedly, especially if they are concentrated in only 1-2 companies.
- #2 create an outline of a strategy that takes advantage of your skills, expertise and track records and how they align to key industry trends
- #3 Figure out if you are prepared to start the firm on your own or if you already know well people with whom you want to start the firm. If not, be prepared to wait a while. As I was advised by Fred Wilson from Union Square, the best way to start a firm is with a great person, who is also a great investor, and who you've known (and ideally worked with) for a long time. I would strongly advise against starting a firm with someone you don't trust and respect completely just because he/she makes it easier (or possible) to get out of the gates. Given the long term nature of the business and its economics, starting a firm with someone is more like a professional marriage than doing any other kind of start up with a co-founder.
- #4 Talk to a couple of potential Limited Partners to see if they are interested based on an outline of your strategy and your track record. Testing the market and gaining some perspective on your ability to raise the fund before "burning the boats" by leaving your existing job. Do so very carefully. And it is considered bad form to do so with your existing firm's LPs.
- #5 talk to your existing partnership about your departure and endeavor to achieve a graceful separation and even better, the support of your former partners in your new endeavor. They will be a critical reference base for your new fund and you can be sure that any good investor considering your new fund will call them. Other matters include attribution for your track record and what happens to your existing economics and board positions.
- #6 Put together track record. Come up with 20 power point slides. Get your network of supporters, personal investors and references. Hit the road and Always Be Closing
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