How do you raise capital for your venture capital or private equity fund from family offices and high net worths?
I see five innovative new methods for raising capital which emerging managers such as Versatile VC are using, which I’ve ranked in roughly descending order of popularity:
- Join the online communities and virtual conferences where investors participate.
- Use a platform that helps other investors access your fund.
- Generally solicit, under the 506(c) designation.
- Launch a rolling fund.
- Crowdfund from retail investors into your General Partnership.
Will Stringer, CEO, Chisos, observed, “Most family offices won’t respond to cold outreach. You need to build a true relationship with family office investors or other general partners that can make warm intros to family office decision makers. Family offices more than any other allocator rely on trust. Not always the case (and always changing), but today it’s still the majority.” The obvious solution is to get in touch with your friends who have earlier raised or pitched to the family offices. You may also find professional intermediaries who are willing to make an introduction to FO’s.
With all that said, these five methods I outine here may be faster and more efficient. To dive in deeper:
1. Join the online communities and virtual conferences where investors are participating.
For meeting other VCs (some of which may become LPs), among your options are Confluence, GenZMafia, InnovatorsRoom (European focus), and TechAviv (Israeli focus). To find others, see How to find the right online communities. I maintain a proprietary database of the communities I’ve found most valuable, which I share with the other members of the Versatile VC team.
These venues allow you to efficiently get in front of many pre-qualified investors, and follow up selectively on those who seem like a tight fit. Unsurprisingly, the best online communities are limited strictly to LPs. Ideally, you’d partner with an anchor/friendly LP who can spread the word on your fund to other potential investors.
In general, at virtual conferences, I recommend first fill out your online profile with all possible keywords, and your photo. Side-channelling is powerful, the equivalent of going into a corner at a conference and talking privately. Look up the profiles of all of the people attending a conference or in an online community, and send the relevant ones a highly customized message introducing yourself. This is one of the primary advantages of virtual events vs. traditional face-to-face, where people do not conveniently wear a hat with their Linkedin profile visible.
At the public forums, make sure to ask insightful questions. Nechama Leibowitz, a prominent Bible scholar, emphasized the analytic difference between a question and a kushiyah (a Hebrew word with no English equivalent.) A question is a request for information, e.g., “When did the first COVID-19 deaths occur in the USA and South Korea?” (Answer: the same date.) A kushiyah is the result of a sense of difficulty or problem, based on an understanding of the information: “I noticed that the USA had 79 times more COVID-19 deaths per capita than South Korea. Why the disparity?” When you ask a kushiyah, other attendees will recognize they’re working with someone who’s done the homework and taken the next step to probe.
Lastly, follow up promptly. The whole goal of a virtual event is to get in one-on-one conversation with the relevant people there. In the absence of other cues, your speed in following up is taken as a proxy for the seriousness with which you take a new relationship.
Caveat: make sure you’re aware of legal restrictions on general solicitation, unless you are generally soliciting (discussed below).
2. Use a platform that helps other investors access your fund.
A number of platforms help institutional and retail investors to access funds, e.g., Allocate, CAIS, Context365, iCapital Network, OurCrowd, Palico, PrimeAlpha, Revere, and Trusted Insight. A number of other firms offer access both to direct investment opportunities and funds, e.g., iSTOX, Sharenett, Manhattan Street Capital, Proteus, and Yieldstreet.
The advantages: These platforms can be an efficient way to get in front of a large number of pre-qualified investors in an efficient manner. But, most of the investors on these platforms want to see a track record and a simple story. If you aren’t spinning out of a previous fund with a clearly attributable track record, you will likely have challenges in actually closing capital with this route.
The costs are highly dependent on the platform. You may pay a percentage of your management fee, a percentage of carry, a flat upfront fee, a monthly recurring fee, or a combination.
3. Generally solicit under the 506(c) designation.
I was a Partner at ff Venture Capital when we were the first institutional VC fund to use “general solicitation” to raise capital. Rule 506(c) allows solicitations of capital that are exempted from reporting requirements similarly to rule 506(b) (the traditional mechanism fund managers use to raise capital), but allows “general solicitation” to the broad public, including advertising.
Rob Leclerc, Founding Partner, AgFunder, said, “We’ve used Reg D 506c for the last four years in raising our venture capital funds because it limits the restrictions censoring we need to place on our own communications. Every business on the planet uses advertising to market to potential customers, including Boeing which is selling quarter-billion-dollar jets; why should investment funds be any different? To be clear, with a 506c offering, the funds manager is still in control of who gets fund allocation and the investor minimum.” McKeever Conwell breaks down his tech stack for handling LPs in a 506(c) raise.
There are a number of disadvantages to general solicitation. You have an obligation to verify that investors are in fact accredited, e.g., review their tax forms, bank statements, etc. You can typically outsource this for as little as $60 to companies such as VerifyInvestor.com or EarlyIQ.
General solicitation also requires that you engage with a large number of potential investors, many of which will not have a serious interest in investing. You can burn a lot of cycles with tire-kickers.
Lastly, when you’re raising capital for a fund you’re fundamentally selling a luxury good, seen as more valuable because it’s scarce. That’s part of the secret of the hedge fund industry’s success in gathering assets. General solicitation can damage that perception.
4. Rolling funds.
Angelist has popularized a rolling fund structure, using their Rolling Venture Funds. The first few clients of this structure include Naval Ravikant, Sahil Lavingia, Dave Morin, Diaspora Ventures, and W Fund. For helpful overviews, see Will Rolling Funds Roll Over the Venture Capital Industry?; Rolling Venture Funds through the Good Times and the Bad; and Rolling Funds – Welcome to the Uncommitted LP. For a more critical take, see Why We Ultimately Decided Not to Do a Rolling Fund.
Angellist is making this process very convenient, but that said you can theoretically reduce your cost by synthetically replicating the structure yourself. The Fund Group at Wilson Sonsini vetted the rolling funds legal structure (source), and could probably clone it for you. Bryant Smick at Carney Badley Spellman also helped create something similar. In addition, AngelList hired Belltower Fund Group to act as the fund’s administrator, managing back office functions including accounting, tax reports and LP ledger. “AngelList acts as the fund’s Investment Adviser working alongside the fund managers to ensure the LPs are treated fairly and in a consistent manner. This can take the form of checking for conflicts, verifying information, and ensuring that all laws and regulations are complied with.” Belltower could presumably do this for you too.
5. Crowdfund from retail investors into your General Partnership.
As examples, Backstage Capital raised $5m on Republic, and Earnest Capital and Chisos Capital are running Reg CF campaigns (see Sacra’s analysis of Earnest). Will Stringer observed that these platforms “double as a marketing effort. Presumably 1,000s of people will see the offering and many will be investors or entrepreneurs that could lead to opportunities. Another advantage is having 1,000s of investors bought in to the success of your business and thus the success of your portfolio companies. You have an instant community of people who are willing to help you and your portfolio source talent, solve problems, make intros, etc.”
But, Stringer continued, “You have 1,000s of investors to track and keep updated. Most of the platforms streamline this effort fairly well, but it is still more work than having 1-2 (or 0) GP investors. Raising at the GP allows you to pay salaries and legal bills, but it does not solve your investment capital problem. The capital raised cannot be used to invest in other companies.”
The costs can be material, and your success depends heavily on your current network size. Backstage has a massive network and huge brand name recognition; they likely spent very little on marketing, on the margin.
For further reading
- Syllabus for how to launch, manage, and invest a VC fund
- Limited partner checklist for evaluating funds
- Fundraising hacks for VC and private equity funds
- How to Start a Venture Fund if You’re Not Rich
Disclosure: I’m an investor in Republic via HOF Capital, where I was formerly a Managing Partner. Thanks to Prabhat Gusain for research help. I’m not a lawyer and this is not legal advice. This essay is a summary of a class I taught for the Oper8r VC fund accelerator. This essay was previously published in Techcrunch.
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This content was originally published here.