How do you raise a new venture capital fund when LPs barely have enough time to meet with existing funds doing re-ups? It sure ain’t easy, but it’s doable, say VCs who recently closed on brand new funds. Here are three smart strategies you can replicate.
Find LPs who are true believers
Even though the founders of Fuse are veteran venture capitalists, they knew attracting institutional investors to a debut fund would be hard. The firm is led by general partners Cameron Borumand, a former principal with Ignition Partners; Kellan Carter, a former GP with Ignition; and Brendan Wales, a former GP at e.ventures. They decided the best approach was to go after investors who already believed in their mission of backing B2B software start-ups in the historically underfunded Pacific Northwest.
The firm, based in Bellevue, Washington, found like-minded LPs in the “leading business executives in the area,” Borumand said. “They are people we know or worked with in the past. By being limited partners in the fund, they are incentivized to help us succeed.”
The strategy allowed Fuse to quickly raise $90 million in July 2020 toward its target of $100 million. The partners spent the following 18 months meeting with foundations, endowments and funds of funds. “The $90 million came from the strategic executives, and then the institutions that were tracking us saw us doing exactly what we said we were going to do,” Borumand said.
The institutional capital grew the fund to $170 million by the time it held a final close on January 25.
Fuse’s strategy of attracting “strategic executives” from the outset has already paid dividends. “Out of the 20 companies we’ve backed so far, six of them have been sent by our LP community, and we have placed six of the LPs into start-ups as hires,” Borumand said.
Pitch a unique idea
When you’re a venture firm based in Oklahoma, you need to figure out how to get noticed. Roshan Pujari, CEO of Vikasa Capital, did that by getting LPs excited about lithium. His Vikasa Clean Energy I fund is focused on doing three deals related to the discovery of lithium and rare earth metals used in batteries for electric vehicles.
Pujari held a first close on just $100,000 from friends and family in October 2020. He then spent the following 17 months pitching institutional investors, giving them the detailed deal data and time they needed to understand his investment thesis. That allowed Vikasa Clean Energy I to attract family offices, funds of funds, foundations and some corporations. It held a final close on $50 million on March 9.
“It’s important to be collaborative with LPs throughout the fund formation process, starting with the thesis,” Pujari said.
Now that LPs “get” his value proposition, he plans to return to market with a much bigger sophomore cleantech fund – in the range of $200 million to $250 million – later this year or 2023.
Go small before you go big
Everyone wants to start out with a big fund, but going with a small, reasonable target is more likely to result in success for a debut fund. That was the approach of Los Angeles-based Navigate Ventures, which held a first close on $19.2 million in January and expects to hold a final close on about $25 million in the next several weeks. The firm has an unusual strategy that wasn’t an easy sell to institutional LPs, so it decided to raise a smaller fund to prove the concept. Fund I’s LPs are primarily high-net-worth individuals and families who wrote checks of $250,000 to $1 million, said Ivan Nikkhoo, co-founder and managing partner.
Instead of trying to hit home runs like most other VCs, Navigate wants to hit singles and doubles and get off the field in a few years. It targets B2B enterprise SaaS companies outside of Silicon Valley that have raised venture money from a brand name VC but have not yet raised a growth round. After about three years, when the company raises growth capital, Navigate plans to exit via secondary in the growth round.
“We have a private equity risk profile with favorable returns and a short holding period,” Nikkhoo said. “I don’t want to wait 10 years before I see returns.”
If all goes as planned with Fund I, Navigate hopes to raise up to $200 million for its sophomore fund from funds of funds, foundations and other institutional investors.