When most people think of venture capitalists, they often think of investors, people who write checks to fund startups. But this image is only part of venture capital. In order to make these investments, venture capitalists must first have the money, which means that they are not only funders, they are also fundraisers.
But when you run a venture capital firm, especially as an emerging manager, how do you know which investors and limited partners (LPs) to target?
After more than 30 years of investing in private and public companies, I have now started out as a fund manager, and I recommend emerging managers ask these five questions before researching and pitching potential LPs.
What LPs are you targeting?
To find the right investors, you must first consider the LP investment criteria.
Institutional investors typically seek managers with a 10-year track record and at least three funds under their belt. These investors may also be reluctant to bet on emerging managers, whom they may perceive to be riskier than established investors, even though Cambridge Associates data show emerging companies accounted for 72% of top performers between 2004 and 2016.
Each rung on the decision-making ladder increases the risk of dismissal, loss of information, or miscommunication, which can be mitigated if you can present yourself to decision-makers quickly.
Managers who retire on their own after working with an existing fund, meanwhile, can target fund-of-funds (FOF) since the FOF will use their track record as a former employee as an indicator of stand-alone experience. Emerging managers can also target niche investors: for example, if you invest in education, a like-minded foundation could be a potential sponsor, or if you invest in medical technology, you could try to connect with hospitals that could benefit from it. of these innovations.
After launching Avestria in 2019, we found that family offices and high net worth individuals were the best targets for us. Their investment requirements are not as stringent as those of institutional investors or FOFs, and they are willing to accept the risk of investing in an emerging manager in exchange for potentially high financial returns.
How well do your target LPs understand your investment thesis?
Emerging managers should find out how well their potential investors already understand the unmet need your fund is addressing.
The venture capital community has a significant influence on what potential LPs see as great investment opportunities. As a result, capital can be concentrated in certain areas. For example, Juul, an e-cigarette company founded by men, received $10 billion more in funding in 2018 than women-founded companies collectively received that year. In 2020, now-defunct video platform Quibi alone raised nearly 8% of the total funding the founders secured that year.
Our fund focuses on women-led life sciences and women’s health startups, and it’s sometimes difficult to recruit LPs who have the most exposure to high-profile investment sectors like consumer goods or media platforms. We often have to explain the white space: women of childbearing age were not allowed to participate in clinical trials, even for products intended for women, until 1993. Even 30 years later, only 4% of all health research and development is aimed at solving women’s health problems.