VC Fund Capital Raising Cycle
“One of the ways you convey the operational excellency is in the quality of the plan.” Marc Andreesen
Capital is one of the productive factors in economies that when it comes together with business skills, a Venture Capital fund is created. Venture Capital fund managers usually need to raise capital (Limited Partners), just like an entrepreneur, in order to carry out their investment thesis.
Like a startup, a fund carries a process of approach and strategy for this process. Just as time is a determining factor for a startup, so is it for a Venture Capital fund. People have a cost of opportunity and not raising resources to develop their activity is a failure.
Typically, first-time funds take on average 35 weeks to raise capital and the second time funds a subsequent 22 weeks (Nick Frost).
Our experience indicates that a first-time fund can have a first close at nine weeks; however, it can take up to two years for a fund to achieve its hard cap. Successful funds that are raising their second fund or following ones, before starting the capital raising are already over-subscribed. Investors want to see financial results and once the fund manager has accomplished the investors’ expectations, he/she is able to raise capital in much shorter time.
Among the preparation activities carried out by a fund in order to achieve this raising are the following:
This is the first stage of the capital raising cycle and perhaps one of the most important. Venture Capital fund managers consider their strengths and experiences in defining the vehicle’s investment thesis and delineating the terms and conditions to be negotiated with investors.
In these initial stages the fund managers define what type of investors could be part of the fund. If it is a first-time fund, it will be investors with whom they have a business relationship and who trust them to start the business. If it is a second or subsequent fund, the track record will be a determining factor in the investment decision.
In any scenario the managerial team must be prepared and develop an “investor database”. In addition, a Non-deal roadshow (Reverse enquiry) can be conducted where the fund manager has meetings with potential investors to evaluate the investment proposal.
At this stage there is formal communication with potential investors to present the fund and introduce the investment thesis, team, track record, previous experience, portfolio, structure, terms, conditions and timing of the transaction.
The team narrows the time to maximize one-on-one meetings with potential investors. In first place with the current investors, if it is a second or follow-on fund. At this point the data room is ready containing the main documents that explain the fund in detail. Sometimes, when raising capital from institutional investors such as pension funds, in addition to the presentation to investors it is necessary to prepare an “Offering Memorandum” and follow the Due Diligence process for each of the investors.
4. Book Building and Closing
Over time, investors show interest with firm positions to contribute capital to the fund. The manager’s objective is to have a first closing as soon as possible, in order to start the fund’s investment activities and receive management fees. Investors are committing an amount of capital during the investment period. This capital is called over time by the manager through the famous capital calls.
There is also a final close that can be up to two years after the first closing. Investors who enter the vehicle after the first closing, and if the manager has already made investments, will have to pay a catch-up fee to match the amount contributed by the first investors and potential interest generated. Therefore, the manager will generally try to have only one closing or else there will not be much time difference between the first closing and the final closing. The manager should also keep in mind that the maximum amount allowed to be raised from the fund (hard cap) cannot be exceeded. This insight is not true for those funds that have a proven track record, because they always have investors waiting, so their first close is also usually the last.
We know how competitive capital raising for funds can be, where crises favor the big players and not the first-time funds. In addition, we understand the difficulty investors face in participating in these large funds, so the option is to support emerging managers who have the management skills and capabilities to become the next mega-fund.
Hector Shibata Salazar, adjunct Professor at EGADE Business School and Director of Investments and Portfolio at AC Ventures Fund
Ana Maury Aguilar, VC Investor at AC Ventures
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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