#94 VC Fundraising Basics & Bear Market Strategies

Hi Everyone! đź‘‹ Welcome to the new members of @TheFundCFO crew! We recently launched a paid tier and released our VC Fund Playbook + Models @ Streamlined.Fund! Re-linking some top 2023 posts: #67 Top VC CFO Posts & References & #65: WTF is Going On in VC (+ New Fund Model Data).

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20 years after 'Jerry Maguire,' 'Show me the money!' still makes bank

“All we have to decide is what to do with the time that is given to us.” -J.R.R. Tolkien

VC Fundraising Recap & The Basics

We’ve seen a lot of different VC fundraising markets in the last 15 years! Previously, we shared posts with lessons learned from VCs such as Fred Wilson @ Union Square Ventures, Jeff Morris Jr. @ Chapter One, Elizabeth Yin @ The Hustle Fund, Winter Mead @ Oper8r, and Mark Suster @ Upfront Ventures.

All have had different fundraise journeys and share unique insights. The background posts are linked here:

VC Fundraising in the Bear Market (August 2023)

As data from Pitchbook (chart below) and other industry sources show, VC fundraising is down meaningfully in 2023 ($77.7b across 592 funds YTD vs. $332b across 3.3k funds in 2021).

Recently, I listened to Mark Suster (Upfront Ventures) and Samir Kaji (Venture Unlocked) discuss “The Art of Raising from LPs in an Economic Downturn) and appreciated the following key insights and takeaways:

  1. Fundraising market for LPs mirrors fundraising for start-up’s. There was way too much capital the last 10 years. We’ve fooled ourselves into thinking fundraising is easy. It’s not. The market today reminds Mark of 2011, when VC fundraising was challenging (Kauffman Report). Not investing then would have missed the best performing decade in VC history

  2. Three pools of active capital: 1) pension funds that did not have access to venture (scaled only, $100m+ checks, won’t invest in funds 1-3), 2) sovereign wealth funds in Middle East and Singapore (scaled as well), 3) RIA’s and US family offices (most attractive place for emerging managers)

  3. Fundraising isn’t easy and takes time: Mark heard a lot of no’s from LPs in 2011 as a first-time managing partner. I’ll tell you the five things I’m going to do and want you to be back when I do it. Maintain long-term relationships, manage through the “no’s” and get to the next fund by executing

  4. Build a sales funnel and pipeline: big believer in referrals to get people that are leaning in. Do great for your customers first. Why buy anything? Then why buy me? Find LPs that are leaning in (growing their VC exposure)

  5. Top of funnel is easy, mid-funnel is hard: mid-funnel is about having a campaign that sustains itself over 6-12 months. Drip documents and messaging over time to stay top of mind. Maintain engagement. Get people out of the office (dinner events in various cities across the US)

  6. LPs love to meet entrepreneurs: what’s going on in AI? That’s what every LP is thinking right now. Hold dinners where entrepreneurs share perspectives

  7. “People don’t care about what you know until they know how much they care.” LPs want to know that you’ll actually care and be a good partner to them. It’s not just a monetary relationship

  8. Unicorns: in 2012, there was one unicorn. In 2013, there were 4. By 2018, there were 125. In 2021, there were 700+ new unicorns. All the mark-up’s in those portfolios won’t be realized in the future

  9. Differentiation & trust: fundamentally, VCs and LPs are buying trust. LPs have diligence lists. Competitive advantages, references, track record, etc. At end of the day, LPs need to trust you’ll be a good steward of capital. That takes time, references (folks reaching out to LPs on your behalf)

  10. Ideal LP meeting: start by listening, not talking. “We have an hour together. Before I start talking, I’d love to learn more about your program if you’re ok with it.” Talk about 1) team/people, 2) data, 3) storytelling about portfolio (4-5 over the course of a meeting)

  11. Reserves: Upfront puts 48% of capital into initial checks and 52% in reserves. Reserves matter. You need to have dollars to protect your positions over time.

Here’s the episode and link and summary if you want to dig further:

Harry Stebbings at 20VC shared some great lessons from his fundraising journey in a podcast earlier this year (re-posting here). He was super direct and open about his experience of what worked and what didn’t. Here are the highlights:

  1. Your Fund Size is Your Strategy: your approach will change according to your fund size target (LP type, messaging, documentation, structure etc). MISTAKE: Starting with too high a target fundraise.

  2. Team & Track Record: your team should be compatible and your track record should support your go-forward strategy. DPI (returned capital to investors) will matter more going forward (managers could previously rely on paper mark-up’s in the bull market).

  3. Navigating LPs (Limited Partners) & Messaging: different investors want different things. You’ll need to message differently to each key group you’re targeting.

  4. Momentum & Friendly Referrals: build momentum in your fundraise. When an investor commits, thank them, then ask them to refer three other potential investors. More on that here.

That’s all for today folks! Thanks for your support and spreading the word! Share this on Twitter or LinkedIn to help grow “the crew!”