Read time: 4 mins
Venture Capital might seem all bling and glamour 🥂🍾🤑
But here are 7 pure backstage insights I wish I had before I dove in.
Well… let’s face it.
Nobody wants to speak out loud about all this.
Why?
Partly because they don’t know, and it takes time to figure it out.
Mostly because it’s a relationship business and you need to be everyone’s friend.
Can’t afford to frustrate your LPs, Partners, other Funds…
But guess what?
I don’t have any ties anymore.
I can go YOLO 🤘
So let me share with y’all what most Fund Managers painfully experience on their long and winding fund launch journey.
1. It takes YEARS to get off the ground… and most of us don’t make it
To launch a VC fund, you’ll need to strap in for 2-3 years of pure trust roller coaster, financial insecurity, and soul-crushing uncertainty.
Unlike startups that can showcase a prototype or some technical progress, VC Funds are pure smoke until their 1st closing.
Until your ‘anchor’ investors decide to take a leap of faith in your beautiful slide deck, you don’t exist.
2. Fundraising never ends…
Funds close in multiple closings. Not 1, not 2, but as many as it takes to hit your target fund size.
These days closings happen every quarter… meaning the fundraising saga never really ends.
And trust me, when you’re spending your life ringing LPs, sending emails, and running around to beg for money, quarters feel VERY long.
3. It’s Not that financially attractive
Those hefty GP (General Partner) packages can seem attractive on paper.
Reality is that you’ll continue feeling financially stressed for 7 years after you launch your first fund.
How come?
GPs have big financial responsibilities. They need to co-invest in every deal, they also need to pay bills, and generally have put themselves in financial stress to start this whole adventure.
GPs won’t feel well-off before Fund III for the most part.
That’s 7 years.
Better not be broke when you start, otherwise you’ll be totally wrecked…
4. Need to wait for 8-10 years to truly see upside
Want to see the real financial upside? You'll need the patience of a saint to get any kind of return on investment.
Yes, you’re well incentivized with a 20% carry.
But that’s the whole fund, distributed amongst Partners, Employees, Venture Partners, and Advisors.
And you’ll need to wait 10 to 12 years to see any of it.
Plus 80% of funds end up never returning money.
Imagine working a full decade for peanuts. Ouch.
5. LP/GP relationships take forever to build
Building trust is a long and patient game.
Those LP/GP relationships are a slow, complex, and mostly frustrating dance…
Think like going out to a club, dancing with a girl the whole night, projecting future dates, and imagining a future together…
Then she coldly vanishes without saying goodbye.
6. Fundraising Over Execution
Turns out the customer is the LP. Not the startups.
Sad but true, to succeed at this game you need a rockstar fundraising team, more than an execution team.
Different game, different players.
And LPs are (still) more inclined to hand money to people they understand and that look like them.
Think 40-year-old-investment banker-rich-white-males.
That’s why there’s no diversity in this space.
7. It quickly gets political in Investment Committees
Thought investment decisions were all about merit?
It rapidly feels more like, "You scratch my back, I'll scratch yours."
Welcome to the political tangle of Investment Committees.
I reveal the secrets about Investment Committees here 🤫
8. Most fund managers are Risk Adverse
It’s particularly true in European VC.
Risk Aversion Reigns.
Those wild, "woohoo" projects that could change the game?
Most fund managers are too risk-averse to touch them.
Don’t want to scare away LPs? And you need to show returns in the next 4-5 years.
Conclusion
Fundraising is brutally hard, often pushing the most seasoned VCs into precarious situations.
You might think that this whole process creams out the fat and only keeps the most adventurous and determined of the gang.
Yes, to be fair there’s some meritocracy in there.
But frankly, when you take a closer look, it’s a self-fulfilling prophecy.
The financial hurdles and patriarchal reflexes are just too strong to enable any form of diversity.
And we **DO** need more diversity in this space if we are to solve the climate crisis. It will take outliers, with vision, grit and an insatiable drive to shake things up.
What solutions then?
I’ll offer ‘out of the box’ suggestions in a future post 😉
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Take care,