Key Takeaways
- Strong operational processes help emerging managers avoid common fundraising pitfalls.
- Technology and service provider solutions can help build a seamless fundraising operation.
- An operational approach to the fundraising process can help reduce the strain on your legal and administrative team, saving time and money.
And that ecosystem is vast and competitive: According to Preqin data, there are about 1,500 U.S.-based emerging funds actively raising capital, which account for 57% of all U.S. funds currently in market. Add these numbers to the 1,500+ already established funds, and it’s easy to see how fiercely competitive the industry has become.
In this environment, those who approach fund management with an operational mindset stand apart from the crowd, especially when it comes to the fundraising process. Creating and refining fundamental operational elements – as well as getting a head start on implementing them – is critical for fund managers who want to outpace their peers in pursuit of institutional limited partner (LP) allocations.
What LPs want to see in your operations
As you begin your journey, keep your eye on the factors that matter to LPs. Be sure to:
- Build for the long haul. LPs want to know you’re in it to win it. Take the time to lay a framework for the future. Create an operational plan for launching the fund and growing it thoughtfully. Set one-, three-, five- and 10-year goals. Map out how you want to support and engage with your portfolio companies. Craft your fund’s mission, vision and values in lockstep with your pitch deck. Construct your team and fund around these beliefs.
- Run tight processes. From your data room to your due diligence, LPs want to see you run a tight, thoughtful and efficient process. Take a proactive (rather than reactive) approach that reduces obstacles, minimizes the burden on LPs and shows you’re prepared to successfully deploy capital.
- Think like an owner. LPs want you to be responsible with their capital. Assess areas where you can minimize costs, outsource for less and optimize for efficiencies. Regularly assess your budget and spend to stay lean and ensure you’re getting the best value for the dollar on your tech stack, tools and other resources.
The role of tech in your fundraising process
A well thought-out, streamlined internal fundraising process that leverages technology should be part of your operational foundation.
The tech serving VC has come a long way, and it continues to evolve in response to demand. Below are some of the best-in-class technologies relevant to the fundraising process. They can help you create a seamless operational flow:
- Data room: DocSend.
- CRM: Airtable or Affinity.
- All-in-one infrastructure platform to connect the operational components of your fundraise: Flow.
- LP portal: Use what your fund administrator already has in place or consider an institutional-ready solution like Flow.
- Investor onboarding: Flow can take the place of a manual tool like DocuSign.
The work doesn't stop at selecting the best service providers and technology. Understanding how to implement processes and leverage your service providers and technology is critical. For example, when using a fundraising platform such as Flow, map out the process with your internal team, your Flow team, your fund administrator and your legal team. Define deadlines, roles and responsibilities, as well as when and how to deploy communications with LPs.
How Flow can help
Flow is a software platform that connects asset managers with their LPs and third-party service providers to accelerate VC & PE fund operations.
Unlike other so-called “all-in-one” platforms, Flow does not attempt to replace critical third-party service providers such as law firms, fund administrators or fund accountants. Instead, Flow is built to empower service providers rather than eliminate them.
With Flow, you can:
- Improve the LP experience. Impress your investors with an intuitive, digital-first experience, including universal platform IDs that securely store contact and entity details for future transactions and information requests.
- Simplify the subscription process. Transform analog paperwork into digital smart forms that leverage conditional logic to weed out irrelevant questions, eliminate errors and reduce back-and-forth.
- Create a single source of truth. Maintain a central repository of structured data and fund documentation. Empower all stakeholders to easily find what they need (and put a stop to the endless stream of ad-hoc requests).
- Integrate any third party. Save time and money by collaborating more efficiently with external service providers. Flow is universally compatible, meaning you can work with any law firm, fund administrator, auditor or other third party of your choice.
Firms including Quiet Capital, Susa Ventures and L’ ATTITUDE Ventures rely on Flow to streamline their fundraises and ongoing fund operations through smart subscription technology, a shared portal for fund documents and data, powerful tools for investor relations and a public API.
Approaching the first close with an ops mindset
With your tech stack in place, you can start drafting your term sheet. Your lawyer can provide you with a basic term sheet (not to be confused with your investment term sheet) that you’ll further customize to your structure and strategy. The term sheet is one of the first documents you’ll circulate to potential LPs, along with marketing materials such as an executive summary and a pitch deck.
As conversations take a more serious turn toward soft commitments, it’s time to draft your limited partner agreement (LPA) with your legal team, which will add the terms from your term sheet into a standard LPA template. From there, you and your lawyer will work together to further customize to your structure and strategy.
After the draft LPA is ready, circulate it to your LPs for review. If you’re fortunate enough to have these LPs’ serious interest in the early stage of fundraising, have them review your LPA first to get negotiations and major changes out of the way. Expect anchor and more-sophisticated LPs to negotiate terms. Your legal team should guide you on which LP asks are reasonable and common, as well as those that you can push back on.
Once your anchor LPs are satisfied with your LPA, circulate it to other prospective LPs. Negotiations with these LPs should be minimal, if any. As a rule, if LPs are making large economic demands, they should match those asks with a large check or their addition should serve as a significant strategic value-add for your fund.
As LPs are bombarded with opportunities to invest, setting a first close date creates a much-needed sense of urgency and FOMO that will propel you closer to raising your fund. Once you decide on the date, confirm it with your service providers, including your legal team, fund admin team and reps from the fundraising software you’re using. Given the current market, it’s critical to give service providers teams at least four weeks’ notice.
Once you are aligned on a first close date, it’s time to get prospective LPs looped into the process. Ideally, you should give LPs at least two weeks to complete subscription documents. Concurrently, your legal team should review the subscription documents for completeness and accuracy before passing them off to you for countersignature. On the date of the first close, your legal team will send an email to the LPs notifying them that their subscription agreements have been fully executed and they are formally accepted into the fund as of that date.
Reaping the benefits of a strong first close
A well-designed and operationalized approach to your fundraising process can save you both time and money by significantly reducing the strain you’ll need to place on legal and your fund administrator. Strong preparation will also help you avoid common fundraising pitfalls emerging managers make due to the lack of process. And you’ll be able to maintain accurate and important data on the status of the fundraise, which can be crucial to your pacing.
Most importantly, you’ll reduce friction on your LPs. Demonstrating that you can run a strong process will build their confidence in you as a fund manager and ideally set the stage for larger subsequent checks in future raises and referrals to other LPs in their network.
Learn more about Flow’s software platform.