The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, 2nd Edition

PART One Raising the Venture Fund

Raising the venture fund, especially first-time funds, is not for the faint of heart. Institutional investors or limited partners (LPs) look for the following:

• Performance track record and background of fund managers
• Investment strategy and its relevance to (a) managers’ expertise and (b) market conditions

The LP universe is diverse. It includes pension funds, endowments and foundations, corporations, private family offices, and individuals. The motivations for each are primarily financial returns and asset diversification. LPs expect venture returns to be at least twice those offered by liquid securities, such as public market indices. Top quartile venture returns average upward of 20 percent of the internal rate of return (IRR).

According to Preqin research:

• Fifty-two percent of venture funds complete their fund-raising in 12 months. Others spend as much as 24 to 36 months on the road.
• Of the funds that successfully got off the ground, only 7 percent are first-time funds.
• About 70 percent of the funds successfully reach or exceed their targeted fund amount.

Placement agents are able to offer market intelligence and accelerate the fund-raising process via LP relationships for newer funds. Some LPs shun the venture asset class, as it is harder to establish determinants of consistent performance. Others play with only a select group of top-tier venture funds. Some choose to invest in a fund of funds or move over into other subclasses of ...