Best Practices for Launching a Venture Capital Fund: A Guide for Emerging Fund Managers

Launching a venture capital fund is a significant undertaking, akin to stepping onto a stage where the risks are high, the opportunities are great, and every move you make can affect the future of several startups. It is a process full of opportunities, such as discovering innovative ideas, working with dedicated startup founders, and having the chance to impact industries before they become mainstream. However, it also involves a great deal of responsibility. 

Venture capital is a high-risk, high-responsibility asset class that requires clear strategy, disciplined execution, and long-term thinking. Therefore, it is of critical importance that one starts on the right foot. Every move, every decision, and every action counts, whether in structuring the venture capital fund, raising capital, or working with startups. 

This guide offers best practices for launching a venture capital fund in an approachable, helpful way, especially for emerging venture capital fund managers looking to make a meaningful impact and build a successful venture capital fund.

Start With a Clear Vision

Before making any move, you must have a clear vision of what you want your venture capital fund to be. To this end, ask yourself:

• What industries get you most excited?
• What stage of the startup lifecycle will you be investing in?
• What impact do you want to make?

Having a clear vision in these areas will affect every decision you make, whether you are raising capital or working with startups. Investors and limited partners will want to know what your strategy is and why your venture capital fund is necessary.

LPs are the lifeblood of a fund, including high-net-worth individuals, family offices, institutions, and corporations. Each of these types of LPs has unique preferences, such as:

• High-net-worth individuals may place significant importance on personal connections and storytelling.
• Family offices may place significant importance on diversification.
• Institutions may place significant importance on track records.

While preferences vary by individual, high-net-worth individuals often value personal relationships, family offices may prioritise portfolio fit, and institutions typically require evidence of a repeatable strategy and track record. Knowledge of these preferences will help build a structure and pitch that foster credibility and trust from the outset. Relationships are as meaningful as numbers in the venture capital world.

Know the Legal and Regulatory Landscape

Venture capital funds are subject to regulatory oversight that varies by jurisdiction, particularly around fundraising, investor eligibility, and reporting. In most VC funds, the general partner manages the fund while LPs provide capital with limited liability.

A general recommendation for first-time fund managers is to consider syndicate funds as a precursor to launching a VC fund. You can easily set up and manage syndicate structures at a lower cost. It enables you to raise capital for specific deals without the complexity of a VC fund.

At Angel School, programs like Syndicate Blueprint help emerging fund managers navigate this process. It teaches emerging fund managers the basics of syndicate structures, legal frameworks, and best practices, all without the burden of a VC fund. It is an easier route to gain experience and build credibility, which will help launch a first fund.

Build a Strong Investment Thesis

Your investment thesis acts as a guiding principle. Your investment thesis explains your rationale for investing in specific opportunities to your LPs and startups. A solid investment thesis also answers questions such as:

• What sectors or technologies do you find most attractive?
• What stages of startup growth do you want to target?
• What target returns (e.g., fund multiple or IRR) do you aim to achieve?
• How do you plan to contribute beyond capital?

Having a thesis statement is also essential to staying focused, as without it, you might get distracted by opportunities that are not a good fit. Your thesis statement is like a lighthouse, which always points in the right direction in the midst of numerous possibilities.

Assembling the Right Team

Venture capital is a team sport, and even a lone GP requires a strong team. Key team components include: 

• Investment partners with complementary skills
• Sector-specific advisors
• Operational support for fund operations
• Legal and compliance support
• Fund administrator
• Tax advisors

Your team is a reflection of who you are, and a strong team with experienced members gives your LPs confidence, providing the bandwidth to evaluate investments thoughtfully.

Fundraising: The Plan Before the Pitch

The most challenging part of the venture capital process is often fundraising, which requires time, effort, and patience. Before you begin the fundraising process, it is essential to develop a fundraising plan:

• Warm introductions remain the most effective path to early LP conversations.
• Determine a fund size target based on your track record and network
• Create a pitch document that includes your investment thesis, track record, deal flow, and risk management strategy
• Leverage your network; the most effective way to meet new LPs is through personal introductions
• Develop a fundraising timeline, which typically takes between 6 and 18 months

Remember, fundraising is about telling a story, not just presenting numbers. Investors invest in people first, then the idea.

Develop a Deal Sourcing Strategy

Successfully closing a fund is only the beginning—you must then deploy capital effectively. You need a pipeline of attractive deals to invest in. Deal sourcing is competitive, and you need a strategy to source deals. It includes: 

• Building relationships with founders and incubators
• Utilizing connections from previous investments or syndicate deals
• Engaging in events, demo days, and pitch competitions
• Collaborating with other investors for co-investment possibilities

A constant flow of high-quality deals helps efficiently deploy capital and maintain high returns.

Conduct Rigorous Due Diligence

Due diligence is the foundation of good investing practices. It is essential to focus on the following aspects of due diligence:

• Founders: their experience, dedication, and ability to deliver
• Market potential: its size, growth, and competition
• Financials: revenue projections, burn rate, and margins
• Legal and regulatory aspects: intellectual property, legal compliance, and contractual obligations

Establishing due diligence checklists helps in maintaining consistency in due diligence. The more you conduct due diligence, the more confident LPs will feel about the fund’s decision-making process.

Portfolio Management and Support

While investing is an integral part of the job, the real value lies in supporting the startup's growth. Portfolio management is an essential part of a venture capital firm’s activities and involves:

• Engaging with founders regularly
• Offering support to the founder in fundraising, hiring, or strategic decisions
• Facilitating connections between the founder and partners, customers, and advisors
• Tracking key performance indicators and financial health

The idea is to add value beyond capital investment. When portfolio companies do well, so does the fund, and so does the fund’s ecosystem.

Risk Management is Key

Venture capital investing is a risky business, and not every investment may be successful. Managing these risks effectively requires:

• Diversification across sectors and stages of investment
• Managing LP expectations and keeping them aware of the risks involved
• Reserving adequate capital for follow-on investments 
• Utilizing data and analytics tools to track performance

Effective risk management helps navigate through tough times and helps maintain a good reputation.

Build a Strong Brand and Reputation

Reputation is the core currency of venture capital. In venture capital, credibility generates opportunities. Strategies for establishing your brand include:

• Sharing insights through blogs, podcasts, or newsletters
• Participating in industry panels or conferences
• Publicly supporting founders and startups
• Demonstrating integrity in all dealings

Having a strong brand helps you attract better deals, partners, and LPs over time. Having a strong track record is essential, but a strong reputation is often a prerequisite.

Reporting and Transparency

LPs expect transparency. Good reporting helps build trust. You should do this regularly, and it should include:

• Updates on the portfolio
• Investment rationale for each deal
• Challenges encountered and key learnings.
• Financial statements and fund performance

Transparent reporting reduces friction and helps build strong relationships. LPs expect this and appreciate the transparency.

Continuous Learning and Adaptation

The venture industry is dynamic. New fund managers must commit to learning. It involves attending workshops, staying abreast of industry trends, and learning from seasoned GPs. Angel School’s Syndicate Blueprint program helps participants understand the ropes of venture investing. It is a good place to start. Start with a syndicate and learn from the experience. Once you have enough experience, you can move on to running a fund. It helps you refine your thesis and build a track record.

Exit Strategy and Returns

All investors aim to generate returns. An exit strategy is a key part of venture investing. You need to plan it from the very beginning. It involves:

• Initial Public Offerings (IPOs)
• Mergers and acquisitions (M&A)
• Secondary sales to other investors

Having a good understanding of the exit strategies helps you make better investment decisions. It also enables you to communicate with LPs on how you plan to return their capital.

Staying Compliant

Compliance is an ongoing process. Be sure to comply with all regulations, filings, and reporting. Help is often readily available from legal counsel and fund administrators, particularly for first-time fund managers. Starting with syndicates is particularly helpful in these situations, as they tend to have lower compliance hurdles, making them a safe place to learn.

Community and Networking

Venture capital is a people business. Network with:

• Other fund managers to exchange insights
• Entrepreneurs to source deals
• Industry experts to deepen sector knowledge

Having a strong network can be a powerful tool in gaining access to deals and increasing credibility.

Learning Over Perfection

The first fund is about learning, building a track record, and improving decision-making over time. It is inevitable to make mistakes, but it is how you learn from them that matters. Angel School’s Syndicate Blueprint is an excellent resource for learning from others’ mistakes and avoiding them yourself. It is a safe place to learn.

Key Takeaways: Best Practices for Launching a Venture Capital Fund

• Start with a vision and an investment thesis.
• Understand your LPs and tailor your approach.
• Consider starting with a syndicate fund. Legally easier and very instructive.
• Build a strong team.
• Develop a structured fundraising plan.
• Develop a consistent and differentiated deal sourcing strategy.
• Conduct rigorous due diligence on all deals.
• Be active in your portfolio.
• Manage risk.
• Be transparent.
• Build your brand.
• Learning is an ongoing process.
• Establish exit strategies.
• Be compliant.

Adhering to these best practices will place you in the best position to launch your venture capital journey successfully. It is important to note that the journey to success in the venture capital business is a marathon, not a sprint. 

Starting with syndicate funds, learning through structured courses such as Angel School’s Syndicate Blueprint, and gradually working towards a full fund are the most successful routes for emerging managers. 

With patience, persistence, and practice, you too can create a successful venture capital fund that not only generates strong returns but also has a lasting impact on the startup ecosystem.

Closing Thoughts

The launch of a venture capital fund is a challenging but rewarding experience. Starting with syndicate funds, developing strong relationships, and adhering to the best practices outlined in this article are the keys to navigating the challenges of launching a venture capital fund. The journey is a marathon, but with a strong vision, execution, and a commitment to learning, you, too, can make a lasting impact in venture capital. 

Start learning with Angel School today and be ready for this marathon! 

FAQs

What is the first step in launching a venture capital fund?

The first step in launching a venture capital fund is defining a clear vision and investment thesis. Emerging fund managers should identify target industries, startup stages, and the impact they want to make, which will guide all future decisions.

How do I structure a venture capital fund when launching it?

In most VC funds, the general partner manages the fund, and LPs contribute capital with limited liability. Understanding legal and regulatory requirements is crucial when launching a venture capital fund.

How can new fund managers raise capital when launching a venture capital fund?

Raising capital requires a solid fundraising plan. It includes creating a compelling pitch document, leveraging personal networks, and understanding the preferences of various LP types, including family offices, institutions, and high-net-worth individuals.

What role does due diligence play in launching a venture capital fund?

Conducting rigorous due diligence is essential when launching a venture capital fund. It ensures that investment decisions are informed, reduces risk, and helps LPs feel confident about the fund’s decision-making process.

Should emerging fund managers start with a full VC fund or a syndicate?

Many emerging fund managers benefit from starting with a syndicate fund before launching a full VC fund. Syndicates are easier to set up, less costly, and provide valuable experience in deal sourcing, legal compliance, and portfolio management.