Emerging
getty
It’s an exciting time for the venture asset class as a new generation of fund managers is bringing a fresh and more diverse perspective to the market. While there’s no established playbook for building a new fund, there are some principles that hold value across the board.
1. Cultivate an entrepreneurial mindset
Starting a fund from scratch, especially if the fund is not following a traditional model, has quite a few similarities with the early days of building a startup. Both emerging fund managers and founders start out with a hypothesis and need to find resources to test it. They both have to put forward a credible strategy that plays to their strengths, gather feedback from customers – startups and limited partners in the case of funds – and clarify their proposition. If their proposition is rather unusual to begin with, there might be an element of educating the market. As customer awareness and interest increase, they both have to design systems to process demand.
They both have to be mindful of competition and could benefit from post-mortem analysis – having a closer look at the lost customers, deals and projects along the way. They both have to decide what to do in-house, what to outsource and how to navigate regulatory landscapes. VC fund managers – like startups founders – need to think about fundraising as well as hiring and retaining talent.
Although often seen as being on opposite sides of the table, emerging fund managers and founders have more in common than they might think.
2. Place the startup perspective at the core of your fund’s strategy
A rather obvious point for existing venture investors that’s worth reiterating for new entrants to the asset class: just because you have the capital to invest, it doesn’t mean startups will want it. At least, it’s not guaranteed that enough of them will and those that do might not be the optimal selection.
Investors can’t afford to neglect the startup perspective. On the contrary, it should be at the very core of their strategy. As the VC market becomes increasingly competitive, with lines blurring across stages, profiles and geographies, the question remains: how do you structure your fund as a product that appeals to the best founders?
There’s still space in the market for a variety of investor profiles and approaches. Not all founders want the same kind of investors and, especially in the context of larger syndicated rounds, they might not want all investors to look and behave the same.
Own your superpower as an investor and find its place on the spectrum – all the way from efficient decision-making pre-investment to hands-on post-investment support. Encourage founders to share their feedback with you and use those feedback loops to improve.
3. Make it easy for the best founders to accept your capital
Because the number and variety of funding options are on the rise, high-potential founders have increasingly high expectations from the investors they engage with. Investors who are not approachable, responsive and straightforward, or who have unreasonable demands, run the risk of being left behind.
Venture Capital is, at its core, a service business and investors should strive to provide a high-quality experience to founders.
Most investors focus on multiplying the reasons why a founder would want to take their capital, but only some pay deliberate attention to removing unnecessary roadblocks. It’s an underrated but useful question for investors to ask themselves: how can I make it easier for the best founders to accept my capital?
At least part of the answer should be revealed by mapping out the process that founders have to go through when engaging with you, revisiting the standard terms associated with the capital you provide, and looking for ways to decrease friction.
4. Understand the laws that govern venture capital but don’t get stuck in the status quo
There are certain aspects of venture capital that are unlikely to change but many others that are very much open to innovation. Make sure you understand the difference.
In the first category, for example, you’ll find truths about portfolio construction. In early-stage startup investing, the returns follow a power-law distribution, not a normal one, most of them coming from a small number of companies. A diversified portfolio – as defined by the number and types of companies that you’re looking to back – can increase the probability of including a positive outlier. As success is determined at a portfolio level, it’s not about being right all the time, it’s about creating a portfolio of bets; it’s not about the frequency but about the magnitude of success (the Babe Ruth effect). Some familiarity with probability, statistics and the history of VC is beneficial for all emerging managers.
In the second category, you’ll find opportunities to challenge the status quo – from how you want to structure and operate the fund to how you interact with founders and the nature of your support. Study different funds that did well in the past but don’t be afraid to challenge some of their hypotheses and triangulate your own approach.
5. Invest in building your network
In early-stage startup investing, having access to relevant networks and communities can make all the difference. This could include networks of people who build startups or are close to those who do, or other investors and communities of experts who excel at helping startups succeed. Setting luck aside, gaining that access takes time, consistency, effort and energy, which is part of the reason why it can be difficult for new entrants to break through in this people-centric industry.
The trust-building that’s the foundation of strong relationships can be accelerated but only up to a certain extent. Relationships are ultimately strengthened through a series of interaction points and exchanges of value.
Growing a network can very well happen organically but, early on, it helps to be intentional about it. Clarify and share what you can really bring to the table, don’t overpromise and underdeliver. Stay in touch and top of mind, it’s not other people’s responsibility to remember what you offer.
While networking can have a bad reputation – awkward at best, predatory at worst – it is ultimately about having an interest in people and exploring areas for collaboration with the ones you align with. If you have a collaborative mindset and an honest strategy, others in the ecosystem will likely welcome and, as far as healthy competition allows it, root for you.
6. Pay it forward
One of the most rewarding aspects of building a network is spotting the potential for mutually beneficial connections within it. Through the nature of their role, early-stage startup investors interact with many founders, other investors, service providers, corporates and so on. From that vantage point, they can cut through the noise and identify and facilitate relevant introductions. Essentially, act as curators and catalysts that further amplify the networks of those around them.
Your network is part of the value that you can add. Once you have some access, try to pay it forward. Support emerging managers you resonate with, champion founders you believe in, share co-investment opportunities. If you look back, it’s likely that, at the very beginning of your journey in venture, the people who believed in you and opened doors to their network played a key role. Set aside the time to do the same for others.
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