Starting your own venture capital fund is not an easy task. It is a job with many perks, and that is why there is no easy way of creating your own venture capital fund. This article will help you get up to date with all there is to know regarding venture capital fund and how to create it.
What is a Venture Capital Fund?
VC fund or venture capital fund is a pooled investment fund that manages the money of investors who are seeking equity stakes in startups and small to medium-sized enterprises, but ones that have great potential. However, they are considered to be really high risk but at the same time, high reward, as well.
In easier words, these are funds or investments done in small startups and entrepreneurial companies, giving them the ability to raise funding before they have started making a profit or begun operations. However, not so long ago, these investments were only accessible to professional venture capitalists, but now even accredited investors can take part, as well.
If you plan on starting your fund, which will most likely be small (less than $10 million), then this is the ideal place for you!
Start Your Own VC Fund
Follow these steps if you want to start your own VC fund:
1) Prepare and Devote, Mentally:
You can prepare by reaching out to people who have started VC funds on their own. This will help you get a better idea of how to prepare for the upcoming challenges. Remember, it is a long-term investment, and you should be ready to do that.
2) Crunch the Numbers:
You are not the only one setting out big dreams of becoming successful in this field. The competition is fierce, and finding the diamond will not be easy. However, with the right numbers and proper effort, you can turn a not-so-good idea into a very good one. For that matter, it is important to do the math and make sure you have done your homework. This will help you sort out some of the key decisions like, how many deals are you willing to make, what is the size of the cheque you write, how many follow-ons can you do, etc.
3) Define Compensation:
Only you know how much of a backbone you have, so plan accordingly. Some do not decide to go big at the start and like to wait and cut on some expenses. Once the good news starts to flow, that is when they pull the trigger and go all out. This purely depends on you, but remember, do not expect to get rich out of it, at least not immediately.
4) Assemble a SOLID Team:
You cannot go at it alone. If you want to, then you have a better chance by angel investing or by doing syndicates on AngelList. This is a project that requires a strong team around you because you have to do a lot of work!
So, once you decide to start your own VC fund, remember you need a solid team around you, of people that you truly like. This is because the contracts being written will run at least for a decade; it is quite easy to fall out with people!
5) Defining Thesis:
Your thesis decides what you are investing in, as well as the reasons why you’ll be doing whatever you plan on doing. It should have everything from covering your macro-level view of the market to specifying the underlying technologies, etc.
6) Defining Vehicles and Incorporating:
Limited Partnership is the fund itself, and, LLC General Partner is what manages the fund, and these make up the traditional funds. You can use this model, or make up your own, but remember making up your model requires getting a good lawyer who will defer your fees until you close.
7) Pitch and Don’t Stop Pitching:
Pitching takes up the most time, so you should start right away! Before sending invites to online meetings make sure to filter the right investors first. It will save you a bunch of time and time is your asset now.
In the very early days, you’ve got no track record nor capital, and nor backers so the only reasonable ask you could make is to believe in you and by the way, be reasonable about the offer. Forget about 3M+ round for 2% of your business. You’ll be lucky to get 50k for half of your business, which fingers crossed will bring you to 2-3 portfolio companies and which will start building your track record.
8) Start Investing:
The most important part is investing as soon as possible. Try to make sure you can start angel investing before you fundraise; this can help you a lot! This brings a strong case study about you personally, proves that you have experience in doing so, and starts building your portfolio.
Oh, and good luck!