VC Fundraising Process: Guide to Raising High-Potential Funds

According to Axios, venture capital firms raised $162.6 billion across 769 different funds in 2022, topping the record of $151.1 billion set in 2021.

Although the demise of Silicon Valley Bank (SVB) may diminish investors’ appetites for risk in 2023, venture capital funds are still sitting on historically large levels of dry powder.

Wide spectrum of GPs (VC Firms) use FirmRoom to raise funds and in this article, we look at how to elevate venture capitalists' fundraising efforts.

The VC Fundraising Process in Steps

Like any fundraising effort, be that as a startup, a venture capital fund, or anybody else, communication is key. Anybody looking for investor capital has to make a compelling argument about why they should receive the money above all others.

For venture capital funds, as the $162.6 billion figure in the introduction indicates, there’s plenty of competition out there, so the communication has to be honed to a high standard. Communication is where it all begins.

Create an Investment Strategy

A solid investment strategy is at the core of all successful venture capital funds.

It should be a solid, actionable investment strategy that investors will view as being attractive and, hopefully, different to anything else they’ve seeen (see section below on the investment memorandum).

This should also show the cost of entering and exiting the fund, the management and holding fees, and the fund’s exit plan.

Investment Memorandum

Like a startup, a venture capital fund needs an investment memorandum that shows how investors are going to get their money back, and how much it will cost them. It needs to explain which companies will be targeted and why, making this as attractive a proposition as possible.

And as one private equity investor told FirmRoom, when investors consider GPs, there are three ‘golden rules’:

“track record, track record, and track record.”

Secure an Anchor Investor

A good synonym for track record is having a well regarded investor behind the VC firm.

As soon as there’s one credible investor that somebody knows, it’s a cue for them to make their own investment in the venture capital fund. If that firm has backed a lot of winners, other LPs will be more inclined to see the potential in the VC fund currently being put together.

Begin introductions

Interchangeable in order with securing an anchor investor.

When we say ‘introductions,’ we mean meeting people at networking events, conferences, and dinner. While sending pitch decks by e-mail and LinkedIn is fine for startups, for venture capital firms, it reeks of desperation.

The tried and trusted way to do this is through face-to-face meetings. LinkedIn is a good way to find where the links between a GP and potential investors are, and perhaps they can put you in touch.

The Importance of an Anchor LP

A separate section is being devoted here to the Anchor LP to underline the importance of this investor.At the outset, we said that communication is where it all begins.

Having a competent and respected Anchor is, in itself, a way to communicate the credibility of the fund.

These tend to be from the VC fund founder’s own professional investment experience, and can vouch for his or her ability to find attractive investments.

There are essentially 5 reasons why the anchor LP is important:

1. Momentum: As soon as the first substantial investment  is obtained, the rest of the fund’s target funding should, in theory at least, be easier to obtain.
2. Branding: As mentioned in the opening piece, the achor LP gives brand equity to the new VC fund that an otherwise unknown VC fund couldn’t possess.
3. Working capital: As with any funding, the initial funding can help with working capital, which tends to involve office rents, travel and entertainment costs, and more.
4. Enhanced network: The anchor LP will often vouch for the new VC fund among their own contacts, giving it significantly more leverage with unknown contacts.
5. Expert input: Aside from the monetary aspect, the anchor LP may be able to provide some expert insights or resources to ensure the VC fund’s long-term success.

The Importance of Quality Pitches and Targeting the Right LPs

Anyone that’s ever dealt with limited partners (or indeed, general partners) is that there are two things that tend to irk them more than anything else:

1. Poor quality pitches.
2. Unsuitable approaches.

Both can be categorized under ‘time wasters,’ and unless the sender happens to catch that particular LP in an uncharacteristically good mood, the response is unlikely to be favorable.

There are several reasons why it’s important to ensure that both are in place. To begin with, everybody wants to share a high quality pitch deck. It’s the reason that the best ones are shared on LinkedIn and received hundreds of thousands of reactions.

A good pitch deck stimulates the reader, so like all good content, people have a tendency of wanting to share it. And sharing of pitch decks increases the chances of them falling into the hands of the right LP.

As a second point on the pitch decks - and this should be obvious - a poorly written or presented deck reflects badly on the author and the company. The thinking goes that If you cannot compose an attractive 15-page document that outlines the company, how are you supposed to turn that company into a billion-dollar investment?

It’s normal to outsource these things: Nobody expects a VC founder to be a PowerPoint design whizz.

By sending the pitch to the ‘right’ form of VC founder (i.e., one that’s interested in edutech for an edutech company, one that’s interested in agtech for an agtech company, etc.), a VC fund founder not only maximizes his or her chances of hitting the right note with that LP, they also may gain access to that LP’s professional network.

Many LP investments have begun with: “This is not for us, but would you mind if we sent it on to…”

Venture Capital Fundraising Challenges and Timelines

There are four broad phases to the VC fundraising timeline. These are:

Strategy development

As mentioned above, this involves defining exactly what the fund is, who is involved, why it’s destined to succeed, and more.

Time to execute: Simply put, as long as it takes to develop a winning strategy.

Market materials

If the strategy development is convincing, the marketing materials (pitch deck, information memorandum, and website) should all fall into place relatively easily.

Time to execute: 2 weeks to 1 month.

Marketing/Fundraising

Reaching out to GPs, telling them about the fund, and - importantly - receiving feedback.

Time to execute: Anything from one month to 12 months, depending on the market and the fund’s ambitions.

If the fundraising process exceeds 12 months, the founders may need to rethink strategy.

Initial closing

If the venture capital fund reaches this point, it’s onto something. This process involves tying up the loose ends, and letting the financial press (and PRNewsire) know that the fund has been closed and is now actively investing.

Time to execute: one to three months.

Don’t think for a moment that this is as straightforward as these four bullet points might have you believe, however.

The process is fraught with challenges, including:

Limited funding: The maturity of the VC world means that investors don’t have to look to new managers for investments: there are already a plethora of successful ones (with bigger networks) that they can tap. This makes raising the first fund more of a challenge.

Limited matching: Even when a VC fund approximates what an LP is looking for, it may not hit the spot for a number of reasons, size being a popular excuse for not investing (as smaller funds won’t tilt the dial for them).

Different enough but not too different: Finding an investment niche is important, but is a fine balance to strike. VC fund founders need to find that balance between being differentiated from the competition but perhaps not different enough to be seen as ‘exotic.’

The Necessity of Being Prepared for Longer Timelines

Longer timelines are a reality in venture capital fundraising, with shorter timelines being positively correlated with the maturity of the venture capital fund raising the fund.

It’s important to plan for longer timeline, so that you’ve got working capital to deal with the cash flow needs of a young investment fund generating no capital.

Creating a structured set of forecasts can help here: Knowing when an anchor LP needs to be found by, for example, and the fund’s pre-closing burn rate can all help further down the line.

How VCs leverage FirmRoom for Fundraising Success

FirmRoom is now recognized as the ultimate solution for enabling venture capital fund founders to unlock their fundraising potential.

Among the platform’s benefits for these fund founders are:

• Streamlining and expediting the fundraising timeline.
• Keeping LPs engaged and updated
• Collaborating seamlessly with internal and external stakeholders
• Ironclad security and compliance

In addition, FirmRoom includes exceptional customer support, accelerated workflows, and one-click data room setup. Little wonder that it has become the VC fundraising platform of choice for over 1,000 venture capital funds.

Best Practices for Pitching to Limited Partners

Preparation is everything when it comes to pitching to LPs. Experienced institutional investors and family offices will already have seen hundreds of individual pitches, so the fund founder faces some stern competition. This means that they cannot ‘wing it’ when it comes to the pitch. The usual caveats about the need to present dozens of times in front of a mirror apply. Other best practices include:

• If there are figures, memorize them. Showing the LPs that you’re someone who’s on top of the numbers is a good way to gain confidence from the outset.
• Avoid technical jargon. People who use technical jargon or management speak more often alienate investors than attract them. Use plain, to-the-point language.
• Don’t exaggerate or lie: It’s okay to say, ‘I don’t know but I’ll find out.’ It’s far better than guessing on the spot, coming up with the wrong answer, and appearing dishonest.
• Don’t argue: You’ve got to appeal to the LP’s basic instincts. Make them like you. If they provide feedback and take it on the chin. They won’t react well to arguing GPs.
• Tailor the pitch: Make the pitch as personal as possible (“I saw that you invested in…”); this not only shows attention to detail, but engages the GP as much as possible.

Best Practices for Creating a Persuasive and Memorable Pitch

An outstanding pitch deck (link to article) is a document that can quickly unlock millions of investment funds. This is easier said than done, but there are best practices that should be observed:

1. The deck has to standout, visually and in content.
2. The deck should communicate, in as few words as possible, the fund’s objectives.
3. The deck shoud avoid repetition and/or redundant language.
4. The deck should be error-free in language and figures.
5. The deck’s design should be original and avoid plagiarism from other VC decks.

Adopting a Global Approach to Fundraising

Adopting a global approach to fundraising is a tried and trusted way for it to achieve its capital raising goals. One of the advantages of starting a VC fund in the United States is that investors all over the world are willing to invest in the country.

Different trends in different geographies also make this a winning strategy; for example, a Danish investor’s experience in wind farms might make sustainable energy investments in the US more attractive than to many Americans.

Capital is international now and venture capital firms shouldn’t be afraid to exploit this. The most suitable investors are unlikely to be right on your doorstep (it’s possible, but unlikely).

A secondary advantage of using foreign investors is that their geographical distance means they’re more likely to accept unsolicited marketing materials. This also makes it easier to scale up the number of contacts made with suitable investors.

Conclusion

Whatever the approach taken to venture capital fundraising, the funding team should be using a purpose-built data room like FirmRoom.

As the number of investor pitches ratchets up, the more unwieldy the process becomes.