With first time funds reaching new highs of popularity among institutional investors, we’ve collected words of wisdom from a range of experts.
PANEL OF EXPERTS
- Tyra Jeffries, CEO of CreativeCap Advisers, global business advisory firm
- Haakon Gresvig, managing director, Probitas Partners, global placement agent
- Margus Uudam, founding partner of Karma.vc
- Ullas Naik, founder and general partner of Streamlined Ventures
No track record, no problem
Typical fundraising processes rely heavily on a team’s past performance. However, for new teams this can present a challenge.
“Pedigree, past track record, connections and sourcing ability are critical factors in launching a private equity fund. A manager must be able to demonstrate their ability to execute on those factors.” – Tyra Jeffries
“For teams spinning out, who have worked together in the past but don’t have attribution, facilitating reference calls with former portfolio company CEOs and prior LPs enables potential investors to verify their roles in previous deals. External advisers, including auditors, can also help in this process.” – Haakon Gresvig
“Evidencing your connections can be another part of track record development; showing where your sourcing ability is coming from and the quality of your pipeline, which are critical for operating a private equity fund.” – Tyra Jeffries
“In a developed and competitive market, it is advisable to gather some validating capital before approaching investors, and do a deal or two. That way it’s less of a blind pool, so then it becomes a seeded primary or a stapled secondary.” – Haakon Gresvig
“I had been with a successful venture firm previously. The track record from that was helpful. Plus, most of our first fund was backed by people I knew – entrepreneurs and founders.” – Ullas Naik
“We were really lucky to have built up a global track record having previously worked together at the Skype founding engineers’ family office. During those eight years of running the venture capital program we worked with founders globally and gained a good sense of the deep tech scene.” – Margus Uudam
“There tends to be more diversity in the backgrounds of VC founders, meaning they may not have come from a traditional management background or another VC house. We often see people who are experts in their field who bring on people with investment experience to bolster their team.” – Tyra Jeffries
Teamwork makes the dream work
Even the most established houses face huge investor scrutiny when it comes to team composition: how can emerging managers create the perfect team?
“Different investor types (i.e. seeders versus later stage investors) have different expectations when it comes to team composition. Broadly, the larger the investment, the higher the requirements for the team and company as a whole.” – Tyra Jeffries
“The clear preference from investors was to have at least three partners in the founding team. We brought in a chair from a portfolio company we’d previously worked with as we felt he was the right character, and it meant the team was able to cover strategy, finance, HR, global networks; the critical areas needed to support portfolio companies.” – Margus Uudam
“You don’t always see funds launching with operational expertise, but it definitely makes for a stronger proposition. Beyond having good deal people, investors also want to see some ability to operate – essentially this is about running a business.” – Tyra Jeffries
“Having someone with an operational background is a plus, but it’s debatable as to how crucial it really is at the beginning. The most important thing is to have people who are successfully making investment decisions and are deploying capital.” – Haakon Gresvig
Standing out from the crowd
With each fund allocation representing only a small fraction of an investors’ overall portfolio, how can first-timers ensure they’re standing out while also hitting the right mark?
“In reality, the difference for each fund stems from the team’s background, company mission, investment philosophy and what you can bring to the table to ensure portfolio companies are successful.” – Tyra Jeffries
“We worked with an emerging manger in the US where one of the founders had previously been a full-time operating partner. That was hugely appreciated by investors and provided differentiation.” – Haakon Gresvig
“More and more funds are focusing on the same area as we are now, but through our backgrounds, we are very aware of the specific challenges facing early-stage companies in this sector.” – Margus Uudam
When seeking commitments from institutional investors, then today’s managers must reach institutional standards of operating.
“The vital component here is making sure you’re operating within a fiduciary capacity; ensuring all of the agreements and operations benefit both sides; the investor and the management team. It is a considerable red flag if a fund offers terms that don’t readily consider the investor perspective.” – Tyra Jeffries.
“There’s a big difference to running VC investments for a family office and running an institutional fund domiciled in Luxembourg. There was a lot to figure out in terms of structure. My best recommendation is to have good advisers and legal teams.” – Margus Uudam
“From a fund document standpoint, we used a law firm to draft the investment documents. From an administration point of view, we used an outsourced back office provider, who were able to show their systems and process in order to assure LPs we had the right kind of operations in place.” – Ullas Naik
“Most emerging managers know the importance of the back office function – it can be critical. When raising institutional capital, teams will look half-baked if they approach investors without that in place.” – Haakon Gresvig
“You need to think about having a repeatable process to show that you’re thinking about scale, key man risks, unexpected events – and to put processes in place, as these are the risks investors are thinking about.” – Tyra Jeffries
WORDS OF WISDOM
“Many people talk about how difficult fundraising is, but that’s usually because of expectations. When you start out, you expect investors to be excited and to invest in your fund. But this expectation isn’t always true. The reality is, there is a limited number of investors willing to back emerging managers.” – Margus Uudam
“It will probably take longer than you think. We all read about those teams that raised quickly, and they make it look easy, but they are the exception; for most people it takes a while.” – Haakon Gresvig
“It’s about the team, and that’s especially true for first time funds. We invested a lot in ensuring all three partners met with investors, and we took time to build the relationship and trust with investors.” – Margus Uudam
“Being transparent and honest is very important, especially for emerging mangers to build ongoing trust with investors.” – Tyra Jeffries
“When you’re raising for the first time and without a track record, don’t over-optimize your LP base; raise money and get going. In future funds you will be able to add other institutional investors.” – Ullas Naik