By Semil Shah
Without fail, at least once a week, someone pings me or asks for an intro to learn about how I set up my fund Haystack. I think many people want to start a smaller seed-stage fund, which is cool. I’m happy to share whatever I can with others. But I am also no expert. I write about it openly as I go through it as a way to share what I learn and internalize those lessons for the longer journey. Here are some of the most common questions I receive:
Should I raise a fund?
Sure! You should try to do what you want to do. If you’re a bit more careful about charging ahead, the two key questions I’d ask are 1.) are you excited about the deal flow you have and 2.) do you have access to a stable base of capital to invest? If the answer to either question is met with hesitation, realize it will take a long time.
How much capital should I raise?
It depends on what kind of investment model you want to pursue. There’s no right answer. One has to consider factors like investment pace, number of investments to make over a defined period, and how to model out a return once all the principal is returned to investors. Based on the time and paperwork and fees it takes to get up and going, my stock line is that $5 million is the minimum one should seek to set up a fund vehicle. Doing less is still a lot of work without the benefits that come from having at least $5 million.
Should I have a partner?
Again, it depends on what you want to do and build. If you know someone well and they align with your objectives and values on a long-term basis, it is probably a good idea to consider it. Having a partner can help a team see more deals and lead to better decisions, and you get a companion in the journey. Institutional LPs prefer their funds to not have sole “key man/woman risk” in the event something happens to a single GP. On the other hand, partnerships that blow up due to misalignment are painful to watch and tough to recover from.
What kind of model should we construct?
On a clean sheet of paper, list out your variables: Number of deals per partner per quarter; average check size; investment period; and reserves you’d keep to follow-on into new deals. You’ll also need a budget for fund expenses and fees, if appropriate.
How much money do I need to start?
Most LPs will want to see that you can commit 1 to 3 percent of the total fund size from the GP accounts to ensure incentives are aligned. In some larger funds, this percentage can be higher.
What if the fund doesn’t generate enough fees?
Smaller funds generate small fees, some small enough to not make it worthwhile to take fees. In that case, the investor needs to supplement income in some way.
Who should we raise from?
People that you know! It’s a trust business, so unless you have an exceptional background and/or access to a unique network, people have many other options.
How much time will it take?
If you know people with money who really trust you, it can take a few months. If you don’t, it could take years. There are well-known investors in the Valley who have confided in me that their first funds took well over 12 months to raise.
Should I just raise it on AngelList and run Syndicates?
If you have enough money for the deals you’d like to do and can encourage people you know to co-invest alongside you, AngelList offers many benefits. Without a formal fund, you can still leverage your investment, charge a carry (if you want to), not have to raise a specific vehicle, and hire service providers for back office help, and each deal turns into a special purpose vehicle (SPV).
There are benefits of having your own fund, too, of course, and there are options where you can pursue a blended strategy if you can pull it off.
Back office and service providers?
Simple advice would be to ask for referrals and bring on shops that have experience in handling small funds. There are so many details here, and most investors cannot manage it themselves.
I’ll end the FAQ by underlining a few disclaimers. One, I’m not an expert at this; I’m working hard to figure it out myself. Two, going into this without a clear lane for deal flow and without a clear capital partner to get started is really hard. I would never discourage anyone from trying, but it could take a lot longer than you might imagine. Three, experience matters. I was exposed to venture investing a bit before I started, but that’s no substitute for doing it before at an established venture fund and/or working as an operator in a dynamic technology company and making angel investments over the years.
The narrative over the past few years has been that anyone can and should invest, and that’s true. But those who hold demonstrable and relevant experience will have a huge fundraising and deal flow advantage over everyone else. That’s the hard reality to consider before going down this road. Good luck!