Starting a New VC Fund: A Comprehensive Guide

Starting a new VC fund requires a solid foundation, which begins with defining your fund's mission and investment strategy. This involves identifying your target market, industry focus, and the type of companies you want to invest in.

A typical VC fund size is between $50 million to $500 million, with the average being around $100 million. This size allows for a diverse portfolio and sufficient resources to support portfolio companies.

Your fund's management team should have a mix of investment expertise and industry knowledge. Aim for a team with at least 2-3 members, including a Managing Partner, Investment Manager, and Operations Manager.

Establishing a strong network of relationships with entrepreneurs, industry leaders, and other investors is crucial for sourcing high-quality deal flow. This network can be leveraged through attending industry events, joining relevant organizations, and engaging with online communities.

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Starting a VC Fund is a complex process, and one of the first decisions you'll need to make is what type of fund structure to use.

There is no standard structure for venture capital or private equity funds, so you'll need to consider various options such as customised unit trusts, ESVCLPs, VCLPs, and MITs.

The size of your fund will play a significant role in determining the best structure, as well as your investment strategy, the sector and industry you're targeting, and the stage of development of your portfolio entities.

A fund's tax residency status and level of sophistication of the intended investor base will also be crucial factors in choosing the right structure.

Starting a new VC fund requires careful preparation and planning. A clear investment thesis is essential, as it defines the fund's investment strategy and helps attract like-minded investors.

According to the article, a well-defined investment thesis should include specific sectors, stages, and geographies to focus on. This helps to create a cohesive investment strategy and reduces the risk of spreading resources too thin.

It's also crucial to establish a strong team with diverse skill sets, including investment, operations, and marketing expertise. A team with a proven track record in venture capital can be a major advantage in attracting top talent and securing deals.

Having a VC fund is essential for startups that need a significant amount of capital to scale quickly.

A VC fund provides access to a large pool of capital, which can be used to fuel growth and expansion. According to our previous discussion, a typical VC fund size can range from $10 million to $500 million.

A VC fund can also provide valuable guidance and mentorship, which can be crucial for startups navigating complex business decisions. As we've seen, a VC fund typically has a team of experienced professionals who can offer expert advice and connections.

Having a VC fund can also provide a level of credibility and legitimacy, which can be attractive to customers, partners, and employees. This can be particularly important for startups that are still building their brand and reputation.

Starting a VC fund requires a significant amount of capital, typically ranging from $10 million to $50 million.

You'll need to have a strong network of connections in the investment community, which can be built by attending industry events, joining venture capital associations, and participating in online forums.

A good VC fund manager typically has a track record of successful investments, often with experience in the startup ecosystem.

Budgeting for a VC Fund is crucial to understand the financial implications of your venture capital fund.

Your fund size, or total committed capital, is the primary driver of your budget for capital to invest.

Management fees are typically a percentage of your committed capital, paid over time with a constant percentage per year.

Organizational fees, such as legal costs to create the fund, are typically a one-time charge to the fund in the first period of operation.

Operational fees, including annual fund administration expenses, taxes, audit, and fund legal costs, are charged annually while the fund is operational.

The size of the portfolio and scope of investments will impact both organizational and operational fees.

You'll need to consider budgeting for multiple periods over time, such as per year, per quarter, or per month, if you're modeling cash flows over time.

This will help you understand how your fund size will directly determine management fees and related expenses.

Starting a new VC fund requires a significant amount of capital, with most funds raising between $10 million and $100 million in their first round.

To achieve growth, focus on building a strong team with diverse skill sets and experiences, as seen in the example of Fund A, which has a team of 5 members with backgrounds in finance, marketing, and technology.

A well-defined investment strategy is crucial for success, and it's essential to identify a niche or focus area, such as Fund B's focus on early-stage fintech startups.

A typical VC fund's investment period is around 10-15 years, during which time the fund will make investments, exit investments, and return capital to investors, as outlined in the fund's lifecycle.

By following these key principles, a new VC fund can set itself up for long-term success and growth.

Tracking your investments is crucial to understanding your portfolio's performance. Create a schedule of capital reserves and track your capital deployment pacing to see if you're deploying capital faster or slower than expected.

To report investment performance, you may want to create two models: one for tracking investments and another for forecasting. This will help you compare actual performance to your original budgeting strategy.

A time-based fund model requires a forecast of proceeds and write-offs. Use your earlier assumption of gross exit multiple and average hold period to calculate when proceeds happen and how large they are.

Proceeds from investments can be recycled into new investments or distributed to investors in the fund. This is a key consideration in portfolio construction.

Surviving a VC fund is no cakewalk - you're running a small business with all the usual headaches.

HR issues are a smaller factor due to smaller team sizes, but portfolio company issues will take up more time.

Early-stage startups need help with sales, marketing, recruiting, engineering, and more to stay afloat.

A $200 million VC fund will have more portfolio companies than a $200 million PE firm because each deal is smaller, and VCs must invest in dozens of startups to have a chance at a single "home run."

You'll be dealing with LP complaints, exit time frames that are long, and the need to "sell" your next fund based on preliminary results.

HNW individuals may not understand these issues, making LP relations tricky.

Having a venture capital firm can be a high-risk, high-reward endeavor, but the good news is that if it doesn't work out, you have more options than someone whose private equity firm or hedge fund didn't.

You could easily join a startup in a finance or fundraising role, leveraging your existing network and expertise to find a new opportunity.

If you want to stay in the investment game, you can consider angel investments, which allow you to invest in startups directly, or syndicates, which pool funds from multiple investors to invest in a single startup.

Alternatively, you could join a larger, established venture capital firm, bringing your experience and expertise to a more established organization.

Financial modeling is a crucial step in starting a new VC fund. It helps you understand the impact of variability in your assumptions and plan for the future of your fund. Spreadsheets, primarily Microsoft Excel and Google Sheets, are the most common tools used to build financial models for venture capital funds.

You can use pre-built VC fund model templates in Excel or Google Sheets, such as the Portfolio Construction for Dummies template by Hadley Harris, or opt for web-based tools like Causal, which offers prebuilt functionality for range-based inputs, scenario analysis, and probability-based distribution of returns analysis. Causal's Venture Fund Model and Venture Capital Model templates are also great options.

To get started, model the total fund investments and returns, which is a simple exercise that can be useful for basic understanding of fund strategy. You can use a one or two sheet model for your first attempt. As you develop your competence in modeling and understanding of venture economics, add in more complexity and detail to your model.

When building a financial model for a venture capital fund, having the right tools and templates can make all the difference. Spreadsheets, such as Microsoft Excel and Google Sheets, are the most common tools used for this purpose, due to their accessibility and familiarity.

If you're looking for pre-built templates to get started, there are several options available. The Open Source Venture Model (V1) by Sam Gerstenzang is a free template that can be a great starting point. Another option is the Portfolio Construction for Dummies template by Hadley Harris (Eniac Ventures), also free.

For those who want to take their modeling to the next level, Causal is a web-based tool that offers pre-built functionality for range-based inputs, scenario analysis, and probability-based distribution of returns analysis. With Causal, you can create a model that completely replaces an Excel or Google Sheets model, making it easy to use and share with potential limited partners.

Here are some popular financial model templates for venture capital funds:

These templates can help you get started with building a financial model for your venture capital fund, and can be a great resource for learning and improving your modeling skills.

A gross exit multiple is a simple way to forecast return expectations, assuming a multiple for invested capital. This method abstracts away how the multiple occurs, not requiring you to model underlying changes in invested capital.

A schedule of distributions, or waterfall, depicts the flow of capital to investors based on fund agreements. Limited partners are typically paid back their invested capital first, with general partners receiving carried interest based on performance.

Assuming a gross exit multiple for different types of investments, stages, or overall blended multiple adds more detail to the model. A typical method is to create a table of exit types and multiples, along with the percentage of companies achieving each exit.

Creating an expectation of entry valuation, overall dilution, and average exit can help ground your gross exit multiple assumption. This can be done by creating a more detailed portfolio construction, showing how you expect to earn the gross exit multiple.

Revenue Funds are a type of investment vehicle that earns returns through distributions from companies' revenues. This is in contrast to traditional venture capital funds that rely on exits from companies.

To model a revenue fund, you'll need to create a schedule of proceeds that aligns with the timing expectations of revenue-share agreements. This schedule will help you estimate the future cash flows of the fund.

Revenue-share agreements typically involve investing in companies that generate revenue over time, rather than relying on a single exit event. This approach requires a different modeling structure than traditional venture capital funds.

The basic structure for modeling a revenue fund still involves estimating the fund's future cash flows, but with a focus on the revenue-sharing agreements in place.

For a new VC fund, the fund structure is a crucial aspect to consider. A Limited Liability Company (LLC) is a common structure, and a separate LLC is formed for the General Partners in each fund.

The paperwork may be simpler for small VC firms compared to PE firms, mainly due to smaller deal sizes, less capital, and less control over portfolio companies. This can result in reduced legal fees, potentially saving a few hundred thousand dollars.

You'll need to create a Limited Partnership Agreement, an Offering Memorandum, and Compliance and Risk Guidelines, among other documents.

A venture capital firm is typically structured as a Limited Liability Company (LLC), with a separate LLC formed for the General Partners in each fund.

Funds are often Limited Partnerships or Limited Liability Firms, which is a key distinction to note.

You'll need to create a range of documents, including the Limited Partnership Agreement, the Offering Memorandum, and Compliance and Risk Guidelines, among others.

The paperwork may be simpler for small VC firms compared to Private Equity firms, due to smaller deal sizes, less capital, and less control over portfolio companies.

For a first-time VC fund, the rest of the team doesn't matter that much, but the paperwork still needs to be done.

Legal fees can be significant, ranging from a few hundred thousand to over $1 million, depending on the complexity of the fund.

The best fund structure for a new venture capital or private equity fund will depend on various factors, including the fund's size, investment strategy, target portfolio entities, and tax residency status of the investors.

Realistic compensation for a VC fund is a crucial aspect to consider. You might wonder how much you can earn from running a VC fund, given the time, effort, and money required to raise it.

A base salary of $250K per year is a realistic expectation, but after taxes, this might be around $160K per year. This means you'll need almost 5 years to earn back your initial contribution of $750K before even factoring in living expenses.

The 2% management fee will scale down after the first 5 years, and the total fees over 10 years of a VC fund are usually around 15% of the committed capital, which is $7.5 million in this example.

Most VC funds, especially first-time funds, do not earn a 2.8x multiple, the average multiple is closer to 2x, and plenty of funds do not even return 1x, so the GPs earn nothing!

Here are some possible annualized compensation scenarios for a VC fund:

Keep in mind that these scenarios are based on the example provided, and actual compensation may vary depending on the specific fund and circumstances.

The fund structure is a crucial aspect of investment fund management, and it's essential to choose the right one for your venture capital or private equity fund. A limited partnership is the globally favored structure, but there's no one-size-fits-all solution.

Customized unit trusts, Early Stage Venture Capital Limited Partnerships (ESVCLPs), and Venture Capital Limited Partnerships (VCLPs) are some of the alternative fund structure options available in Australia. The best fund structure for your new venture capital or private equity fund will depend on several factors, including your fund's size, investment strategy, sector, industry, and stage of development.

In some cases, the paperwork may be simpler for small VC firms due to smaller deal sizes, less capital, and less control over portfolio companies. This can result in reduced legal fees, potentially saving you a few hundred thousand dollars compared to larger firms.

The general partner's commitment, also known as the GP commit, can be treated as a limited partner interest in the fund's waterfall. This can make it easier to show the economics to both GPs and LPs, but it's not always necessary.

A debt amortization schedule is a crucial component of modeling a venture debt fund, as it shows the repayments of principal and interest, as well as the proceeds from any equity share or warrants. This schedule is essential for accurately modeling the cash flows and impact of the fund's strategy.

Management Company Budgeting is a crucial aspect of fund structure and management. It involves forecasting the cash flows from management fees to support the management company's overhead.

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Typically, funds model the management company through the entire fund life. This means they forecast the management fees from the fund and use them to calculate the management company's expenses.

Funds may choose to assume that they will raise another fund managed by the same management company, showing management fees from the new fund. Alternatively, they may show how the management company expenses will decrease over time.

Management company budgeting is similar to budgeting for any operating company, involving a forecast of hires and salaries, insurance, accounting, legal, and overhead costs.

Management fees can be recycled back into the fund, increasing invested capital. This is a common practice among fund managers, who may choose to recycle up to the amount of the management fees charged to the fund.

Here's a summary of the typical management company expenses:

These expenses are typically forecasted over the entire fund life, using the management fees from the fund as revenues.

LP side letters and varying terms can be a complex aspect of fund structure and management. Some funds create arrangements where different limited partners get different terms, such as different fees or priority placement in the waterfall.

These special terms usually require specific modeling for each consideration, breaking out the LPs separately to show the effect of each term. This is necessary to understand the impact of each term on the fund's overall performance.

Different fees can include varying management fees or carried interest. Priority placement in the waterfall can give some LPs a higher payout than others. Some funds may also work with LPs to be first-loss capital, or get a preferred return prior to other LPs.

Some LPs may even get a portion of the GP carry, which can be a significant benefit. This is just one example of how LP side letters and varying terms can add complexity to a fund's structure.

Starting a new VC fund requires a solid financial model to help you make informed investment decisions and manage your portfolio. Spreadsheets like Microsoft Excel and Google Sheets are the most common tools used to build these models, due to their accessibility and familiarity.

Many modelers use add-ins to assist with scenario modeling, which helps understand the impact of variability in their assumptions. A number of tools for Monte Carlo and scenario analysis are readily available to help understand portfolio construction assumptions and ranges of expected returns.

You don't need to start from scratch, as there are several pre-built VC fund model templates available. For example, the Open Source Venture Model (V1) by Sam Gerstenzang is a free template that can help you get started.

If you're looking for more advanced tools, Causal is a good option. It's a web-based tool that allows you to build models with prebuilt functionality, including range-based inputs, scenario analysis, and probability-based distribution of returns analysis.

Here are some pre-built VC fund model templates you can use:

Alternatively, you can use Causal's pre-built templates, such as the Venture Fund Model by Craig Thomas or the Venture Capital Model by Taylor Davidson.

Tactyc also offers a platform for fund managers to create and manage venture portfolios, which includes features to help understand portfolio construction and fund management.