Laying the Groundwork for Your Future Fund

Three things you should develop so you can raise your own fund down the road: your EDGE, your TRIBE, and your ACCESS to capital

Venture Upward is a field guide for surviving, getting ahead, and succeeding as a venture capitalist. Created by David Beisel (@davidbeisel) and Rob Go (@robgo), it's written for non-partner VCs working their way through the ranks.

If you are currently working in VC, you probably are or at some point will have aspirations to run your own fund. I’ve found that this is true even if someone is very happy at their firm and is enjoying terrific upward trajectory. When you join a firm, you inherit a team, brand, strategy, and way of doing things. It’s hard or perhaps impossible to do the work to reshape a firm from within vs. starting from scratch on your own.

Starting a firm isn’t for everyone. Some people are more than happy to spend their career investing in companies and not doing the other work involved in running and managing a fund (not all of which is glamorous).  But if you are thinking about raising a fund one day, there are three things you should be thinking about to lay the groundwork for the future. These things will ultimately be helpful for you even if you don’t raise a fund. And in some ways, timing is everything, so you want to be prepared when the opportune moment arises.

The three activities to lay the groundwork are: 1) developing your edge 2) developing your tribe and 3) developing your access to capital

Developing Your Edge

Your edge is your answer to the question “how are you going to uniquely win?”.  If you are starting a fund, you should have thought through all the reasons why one should believe that you are a good bet. How are you going to see great opportunities? How are you going to win the best deals? How are you going to add value? What confidence does one have that you are going to be a good steward of capital? There are dozens of things to consider. But just like a startup, there is probably going to be 2-3 things that will really set you apart and will make all the difference.

Your edge is probably linked to the stuff you are getting known for or the unique strategy you have pursued. It could be related to an emerging technology, trend, or geography that is under-the radar or under-appreciated. It could also be an operating model for how you are building your firm that is unique. For example, in the early days of growth investing, the analyst driven sourcing model of firms like Summit was an edge.  More recently in series A investing, the human capital and software centric approach of firms like Signalfire is also a version of an edge.

One thing that gets confused for having an edge is having a great realized track record. Of course, track record is important but is not itself the source of one’s advantage. LP’s will often impute that a great track record suggests that an investor has an edge, but I find that to be backwards looking. I think of track record as more of an enabler to access capital.  The better the track record, the less convincing the edge needs to be to win over LPs.

Developing Your Tribe

Although there has been a rise in solo-capitalists lately, most firms are formed by a partnership of 2-3 people. Even if you are pursuing a fund as a solo GP, most investors have a tribe of their closest founders and collaborators that will help them on their journey. Assembling this group of people starts on your first day in VC. This business is highly unpredictable and it pays to always be on the lookout for people that one day might end up being an important co-conspirator.  

Obviously, finding great partners is the biggest and most lasting decision when it comes to your Tribe. Just like starting any company, it helps to have years of shared history before actually hitching your wagon together. When you are talking to other VC’s or angels about deals that you are looking at, you should be thinking about whether you’d want to have that conversation over and over again with this person if you were founders of a firm together.

One of the things that is really hard to comprehend is how long your relationship is likely to be with your co-founders if things are going well (or how painful it will be to separate from them if things go badly). Ideally, you would like to team up with someone that compliments you in a bunch of practical ways. But I think it’s more important to find someone with values that align with yours and who you genuinely enjoy being with. This is the person that will be shaping the ethos of your firm with you, and that is pretty hard to undo.

Beyond your partners, it’s remarkable how valuable it is to be able to lean on your broader network for help and support in starting a fund. One part of this tribe will be other VC’s that you have gotten to know, both your peers as well as partners at other firms that might be willing to lend you a hand when the time comes. One way that your tribe will help will be with LP introductions. But honestly, I would argue that we’ve gotten even more help from other GPs who have shared their wisdom around topics as important as partnership dynamics or even as mundane as taxes. When we started NextView, we underestimated how much our tribe of other investors and founders would be rooting for us to succeed and were blown away by their willingness to help push down barriers for us. I honestly feel grateful to this group every day and try to do what I can to pay it forward to others when I have the opportunity.

Developing Your Access To Capital

Of course, getting capital to start investing is a big hurdle to getting a firm up and running.  When you do start fundraising, chances are that you will get your first commits from the people who know you the best.  These early “yes’s” are probably more valuable for their market signal and support than the actual dollars. Being able to unlock dollars and support from your existing firm is a powerful signal as well.

But the big chunks of capital for your fund will end up coming from institutions or large family offices. However, it’s easy for mid-level VC’s to be so focused on their next deal that they neglect to develop these relationships at all. When I was an associate, I had chances to interact directly with quite a few LPs during our Annual LP meeting process. Honestly, I largely squandered these opportunities because I wasn’t thinking ahead.  Even if some of the folks you get a chance to meet aren’t ultimate decision-makers, it’s helpful to understand how LP’s view the world, what gets them excited to invest in a new fund, and what they think are the gaps in the market or holes in their portfolio. A big chunk of fundraising in the early days is just mapping out the ecosystem to understand who the likely players are, and that is something you can definitely get a head start on while you are still quite early in your career. And by the way, some LPs like getting to know some non-partners at a VC as it offers them a bit of an inside view into the firm. It’s like having a relationship with a mid-level person at a startup who can tell you how people internally really feel about the business or management team.

Many funds also have family offices as their first LPs but those groups are even harder to identify. These groups are often intentionally under-the-radar or their interest in venture might ebb and flow. As a mid-level VC, you might identify these groups by seeing if any unusual entities are investing in the follow-on rounds of your firm’s portfolio companies. Often these family offices like having direct access to companies, and might see an investment in a new fund as a conduit to those kinds of opportunities. Also, some family office may have a strategic interest in a particular geography or type of company, so pay attention to family offices that seem to be active in areas that you think might relate to your future firm’s edge. This is true for corporate investors as well, although I have no experience with this class of LP’s.

LP’s also generally like the idea of investing in folks that they’ve known for a long time. When an LP commits to a venture fund, they are stuck in a very long relationship with limited controls and lack of liquidity.  Trust is critical, and so it’s very hard to imagine an LP making a meaningful commitment to someone they just met very recently. For this reason, it pays to be cultivating these LP relationships over years and to even see the entire fundraising effort for your first fund in the context of capital raising over the next 10 years. You may feel like you are spinning your wheels in the moment, but you will be surprised at how some of these early efforts will yield fruit in the years to come.

Beyond all this, the best thing you can do to prepare for your future fund is to learn how to be a great investor. At the end of the day, raising a new fund is just vanity, actually making great investments and delivering a great return is where the actual rewards will come from. So while I recommend you keep your eyes open and develop your edge, your tribe, and your access to capital, you don’t want to be too distracted that it takes you away from your day job.

And as a final note, IMHO, the best thing you can also do to prepare for your future fund is to maintain a small personal nut. Having a high-burn lifestyle will mean that you will have a hard time stepping away from a job and absorbing the negative cash flow that typically comes with starting a new fund. So I recommend living lean so that you have maximum optionality and minimum time pressure when the time is right for you to try to start your own firm.