How To Transform A VC Fund Capital Base From Individuals To Institutional LPs

Lots of people have raised small VC funds. There are more startups, and there’s more LP capital from various sources to meet that demand. After the rise of institutional seed funds in the late 2000’s, we’ve obviously witnessed a pure explosion of new (mostly seed) fund formation, with seemingly no end in sight. Many of those 400+ microVC funds (sub $100M) are also trying not only get bigger, but also trying to convert their LP capital base from mostly individuals to mostly traditionally institutional capital. It’s a heavy lift to make that conversion. While I would never give advice on how to do this, as I’m still learning and each individual case is very different (each fund manager is his/her own special snowflake!), I can share a bit about how I prepared myself for it, how I launched my campaign, and how it all closed. My hope is that this post serves as a helpful guidepost for other managers and that it can save someone time in the future. Much of this below benefits from me looking back with hindsight… there’s lots in here that I wish I had known just a year ago!

At a high level, I break this process into three distinct phases: (1) Pre-Marketing Preparations; (2) The Actual Campaign; and (3) The Closing Mechanics.

Phase 1: Pre-Marketing Preparations

Timing: I built my LP list and began putting the word out two months before hitting the market. Now looking back, i wish I pre-marketed a full six months in advance. Institutional LPs need lots of time to meet folks, to digest initial meetings, to socialize things with their network, and to fill their pipeline. I could even argue that six months is too short. During these meetings, it’s nice to socialize your plans, target size, and strategy. LPs will offer great feedback which can be refined and folded into your final official campaign.

Materials: i prepared a master slide deck (with the help of a designer that I paid REAL money to), which I sliced into a very short “email deck” and a slightly longer “presentation deck.” In retrospect, I only needed the shorter deck (to get the meeting, and for LPs to circulate to their colleagues and peers). I sent everything via PDF, with no exception. What mattered most in the materials was explaining the manager’s background & differentiation (what makes you stand out?, the strategy (where to invest the fund), the portfolio construction (how to invest the fund), deal sourcing (where do you get your leads from). I’ll go into more details on this in future posts.

Key Service Providers: I signed up with very well-known and vetted legal counsel in fund formation, fund administration (back office), and banking. For me, finally being able to go with the top class players forced me to play a better game.

LPA Documents: I asked legal counsel to make my fund docs “plain vanilla,” very simple and in-line with the market. I am not a proven manager. I was shocked to hear how many people play games with the LPA when they haven’t returned real capital.

Data Room: I built a data room on Box with a paid subscription. The folders in my Box data room covered the following topics: References (co-investors, follow-on VCs, previous LPs, and portfolio CEOs); Press Mentions; Notable Blog Posts; Raw Investment Data; Service Providers; Marketing Materials; Previous LP Reports; Audit Paperwork; Official Fund Documentation. The file formats in my Box data room were only PDF, .xls, .jpg, and .png.

Lead Qualification & Tools: The pre-marketing campaign is a good time to find out who isn’t a fit. I had a friend who is an LP just tell me even before seeing the deck or anything that it wouldn’t be a fit. He actually helped me a ton in my process. Similarly, I was able to get into the pipeline of other LPs as I hit the market. I managed my contacts and flow through Pipedrive.

Skin In The Game: LPs will look for any new manager to commit a raw dollar amount commensurate with their liquid net worth. To be safe, I would suspect 2% GP commit would be table stakes, and many folks have to finance that. For folks who have the nest egg, wise to expect to put the appropriate skin in the game.

Phase 2: The Actual Campaign

I will just briefly share what I did. I think it is different for everyone. If anything, I would be conservative in how long you think it will take — and then add another 3-6 months to that conservative projection.

At a high-level, I made three initial decisions that, again in retrospect, made (I believe) a big difference — however, it didn’t feel that way until the very end. Specifically, I picked a tight target size range and I stuck with it — I never once entertained going one dollar over the high-end of my target. Two, I told everyone that I’d be “in market” for six months, and that’s it. No special closes. No opening the fund for even the most royal LPs after it was closed. Third, I told everyone that whatever I had at the end of six months would be my fund size and I would fight the war with the army I had, even if it was well below my target. I don’t know why I stuck to this all the way through, but it is what I believed in and I basically ran out of gas as the sixth month came to an end, so it was good to know I was going to stop then.

I put my rear on an airplane. A lot. I flew over 40,000 miles (all in the U.S.). I spent 28 nights away from home, two of them as red-eyes. I probably talked with and had initial calls/meetings with over 200 different institutional LPs. Naturally, most didn’t go to a second live meeting, but more than enough did. I did not wait until an LP was going to be in the Bay Area to see them — they’re usually only here for a night or two, at the most, and they have to see their current managers. I went to see them on their turf, every single time. I took notes in every meeting. I have a pretty good sense now of what LPs are in specific VC funds. Note-taking is important to remember follow-ups, to understand their network and relationship, and to send them things that interest them in their business. As they get more interested in you, they will come meet you in neutral locations or on your turf, and those signals are important markers to pay attention to.

The entire decision often rests on the quality of your references. It is very hard to quickly gin up references. You either have stellar references or you don’t. Even your biggest supporters will share your weaknesses and area for improvement with prospective LPs. Even though I’ve now raised four different funds, I couldn’t believe how much referencing went on this time. There is nowhere to hide. However you’ve treated others and behaved, it will be surfaced — for better or worse. LPs are looking at the history

It sounds corny, but I befriended a good deal of LPs who passed on me very quickly but were so nice and helpful (as people) that i sent them tips on new interesting funds and managers, some of which even led to them making an LP investment. Once you accept that most LPs are decent people and that they’re going to say “no,” it becomes easier to simply have a conversation with them. Some of them are really far away from our world of startups and VC funds; yet, some of them are incredibly deep into it and know way much more than even popular fund managers do. Sure, there will be some that you meet that you hope to never see again, but it’s a very small minority.

I held two official closes. The first close was half-way through the campaign, and most of my insiders re-upped and some super-sized. Looking back, I thought I would have more of the fund done by then — but, no, not even close. In the second-half of the campaign, I turned on the jets and just focused on the institutions. Seven business days before I was set to give it up and go with what I had, I finally got a string of institutional LP commits, like dominoes falling. It was really random. If you follow NBA history, it was like the Pacers-Knicks game where Reggie Miller hit all those three-pointers at the end. It felt like that. I got lucky, but it was really close.

Phase 3: The Closing Mechanics

I only can share some high-level learnings here:

1/ Good legal counsel matters. It is an art to line up these different LPs at the same time and on the same terms.
2/ No one but you has the deep urgency to close. You have to be fierce in pursuit of the close. Some people will get annoyed with it, but you have to close it out.
3/ Expect a major curveball. I can’t say what it will be, but expect to be taken by surprise and roll with it.

[Big disclaimer — I cannot emphasize enough how many people you will need to help you and advocate for you to get over the finish line. I have been in awe of what others have done for me. All the reference calls, extra nudges over text, and pounding the table even in cases when it didn’t work out. I will go through this process and thank folks properly in the coming weeks.]

I hope this helps folks out there. I hope you’ll notice this isn’t as detailed as it could be. I think the process can be pretty simple and straightforward. Set up the materials properly, be human in the meetings, follow-up with precision, and drive people to a decision and close. Lots of folks have been asking me recently “How did you do it?” so I thought it would be only fair for me to share it more broadly and expand on key areas over the next few weeks. Good luck out there!