• StrictlyVC: June 2, 2017

    Friday! Hallelujah. We’re not sure how much more of this week we could take.

    We want to say a huge thank you to investor, advisor, and friend Semil Shah, who, in Connie’s absence this week, has run a series of rare interviews with limited partners, meaning the people who write the checks to venture firms and typically prefer to remain in the shadows so they aren’t constantly hit up for moolah.

    For what it’s worth, we’ve learned a bit this past week, including from one LP who said he’s not a fan of venture firms investing in other venture firms, a burgeoning but growing trend that enables VCs to spread their bets, but can create headaches for their own investors. We also liked yesterday’s interview with another LP who questions whether the concentration of capital we’re seeing at fewer venture firms will invariably spell disaster in terms of returns.

    As reader Tommy Leep publicly observed yesterday, none of the LPs interviewed this week view crowdsourcing as much of a threat to venture capital (though a Twitter follower of Leep noted that perhaps with the rise of initial coin offerings, they should).

    Today’s interview — the last before Connie returns, along with our regularly scheduled programming —  is with an investor at Greenspring Associates. Greenspring is a 17-year-old, Palo Alto, Ca.-based investment firm that’s managing more than $4 billion and invests in both established and emerging venture capital fund managers; expansion stage venture-backed companies; and in secondary investments in venture capital funds and companies. Read on to learn more.

    Sponsored By . . .

    Today’s StrictlyVC is brought to you by CSFI, (aka the Center for Financial Services Innovation), which likes Big Ideas, and its annual EMERGE Financial Health Forum is a great place to get some. This year’s lineup in Austin from June 14-16 includes big ideas around data, reverse ATMs, universal basic income and even how to turn 76 billion transactions into insights (no kidding!). If you want to make sure you’re filling your portfolio with the companies that can help consumers achieve financial health, there’s no better place to understand consumer needs. Save $150 by registering today.

    LP Conversation No. 5: Hunter Somerville of Greenspring

    By Semil Shah

    Hunter Somerville is a partner at Greenspring Associates, which he joined as an associate back in 2011, after logging several years as an associate with Camden Partners, a Baltimore-based private equity firm.

    Last week, we asked him a few questions about the current state of the venture investing ecosystem, and what he’s seeing from his particular perch.

    Some investors think the Bay Area is now home to too many venture firms. Agree? Disagree? 

    Based on data from Pitchbook, there are 591 active venture capital firms in the Bay Area and approximately 761 active firms in other parts of the country. We believe that the Bay Area ecosystem has been and will continue to be the central locus for venture-backed innovation globally and that replicating that flywheel effect elsewhere will never be easy.

    Because of the density of firms present, though, unique sourcing and differentiated post-investment offerings are critical, and complacency around team evolution or brand can quickly lead to a negative course. On the micro-vc side — which is the most crowded — many groups simply don’t stand out in a noisy category [in the Bay Area] with notable exceptions like Pear and others.

    Outside of the Bay Area, we’ve always been a big believer in the notion of “the rise of the rest” that Steve Case has been championing for a number of years. With decreasing start-up costs and engineering talent more widely dispersed throughout the country, we think big companies will continue to be built all over the U.S. in less-traditional innovation clusters like Indianapolis with ExactTarget; Chicago with Grubhub; Cincinnati with Everything But The House; and South Florida with Chewy.

    We’re seeing more fund of funds wanting to invest directly in companies, and we see some VC firms now investing in funds. Will the fund of the future be a hybrid fund? Would this be a good thing?

    Fortunately for us, our managing partners, Ashton Newhall and Jim Lim, were believers from inception that building a venture capital platform instead of just a product was critical. In our first fund of funds in 2000, Greenspring invested in funds, directs and secondary investments under the same umbrella. Since then, we’ve raised separate funds focused on each of those three categories. On the direct side, we remain active expansion-stage investors, deploying capital into companies,  and we evolved our strategy a number of years back away from passive co-investments to instead focus on serving as a lead or co-lead in financing rounds.

    The approach is less common on the LP side and ultimately allows us to builder deeper relationships with our general partners while also imparting an understanding for the GP’s historic funds on an asset-by-asset basis, which we believe is really critical in fund diligence.

    On the other end of the spectrum, we have only seen a few VC firms actively investing in funds and don’t anticipate more significant moves in this direction.

    Are there new tools and methods for LPs to diligence their fund investments? If so, how does your team use them?

    Most folks on the LP side are very accustomed to the standard materials provided in a GP’s data room, although there is certainly variability in the amount of information shared. Specifically, our diligence process is a little bit different than others, as we pay extra attention to the underlying assets in all historical funds. While we love realizations and distributions as much as the next LP, we recognize that venture capital is a longer term asset class and that solely evaluating DPI is a recipe for short-sightedness. With a singular focus on current or historical performance, one could miss interesting spin-out opportunities such as Wing, Aleph, or Banyan, or stay on the bus too long with firms that have failed to navigate generational transition.

    Think crowdfunding will replace early-stage investing?

    Crowdfunding continues to scale and evolve and without a doubt has offered an alternative in the pre-seed, seed and post-seed arenas, and we’ve continued to see further developments specific to AngelList, which recently launched actual angel funds. With these micro-vc funds as part of their platform, there will be more of a reach selectively into Series A rounds and beyond.

    Still, we think most entrepreneurs would prefer partnering with branded institutional venture capital firms beginning at least at the Series A and in subsequent stages as well. Definitely in seed rounds and perhaps eventually in later rounds closest to exit, there could be a future role for crowdfunding, where a board is already fully built-out and where capital is more commoditized. In the middle though, we believe in the enduring power of our venture capital investors.

    ESPN recently reported on how NFL teams monitor and analyze the social media activity of players who enter the draft as part of the evaluation process. Do LPs do something similar when tracking VCs?<

    We absolutely do consider a firm or individual partner’s social media brand. Twitter, Medium and personal blogs are incredible ways for connecting with founders and creating thought leadership. Foundry Group is a great example of a venture capital firm that embraced social media and has built it into a core component of its content creation strategy. Brad Feld’s blog along with the numerous books he co-authored with Jason Mendelson have helped pull back the veil on a lot of concepts that were really opaque for founders. That kind of content creation can be really additive on the brand building side.

    We also actively wait in anticipation for Bill Gurley’s next submission and have been blown away by the quality of content from Bessemer on their cloud index and Tomasz Tungusz from Redpoint Ventures within the SaaS vertical. On the other end of the spectrum, these channels can be abused or turned into a bully pulpit that can erode overall brand equity. We’ve found those that aim to inform through useful content directed at the entrepreneur as truly the most effective.

    (Editor’s note: Greenspring is not an investor in Shah’s seed-stage fund, Haystack.)

  • SurveyMonkey CEO Zander Lurie: IPO, Yes; 2017, Not Likely

    screen-shot-2016-10-23-at-9-18-37-pmOn Thursday night, at a StrictlyVC event at SurveyMonkey in Palo Alto, this editor sat down with CEO Zander Lurie to learn more about the direction of the 17-year-old company, known for the roughly 90 million surveys that the outfit and its customers create for their various constituents each month (and whose average order volume is $300, says Lurie).

    I was particularly interested in Lurie, a former GoPro, CBS, and CNET executive, given his relatively quiet tenure as chief executive — a role he accepted in January after the passing of longtime CEO Dave Goldberg last year (and following a brief stint by a more immediate precedessor, tech veteran Ben Veghte).

    We wound up chatting about the company’s valuation, polling accuracy, and whether and when the company will go public, among other things. Part of that chat, edited for length, follows.

    You’ve been a CEO for nine months. What do you now appreciate much more about every CEO you’ve ever known?

    I always had a boss or somebody who was there for constant feedback, and it’s different when you’re CEO. We have an amazing board of directors . . . but as CEO, you’re in charge of the script: What’s the strategy, who are the teams you’re entrusting to build the company, then all the comms and the motivation and accountability associated with delivering on the company’s promise. It’s on you to be that great storyteller. And I love it, but that’s what has struck out for me. There’s no one to ask: Am I doing a good job?

    You inherited a unicorn company – valued at $2 billion at its last financing in late 2014. You also inherited the company under unique circumstances. Do you feel extra pressure owing to those circumstances?

    We’re fortunate to have one of the most profitable businesses on the internet. You couldn’t really do a survey until SurveyMonkey and its founder really invented this new online survey platform. The company in 2009 had about 12 employees and $25 million in profits, then beloved Dave Goldberg became CEO in a buyout and in six years hired about 600 people, and today we’ll do about $200 million in revenue, with EBITDA margins in the mid 30s. So sure, the circumstances under which I became CEO were awful. Dave was one of my best friends in the whole world. But the culture he built, and his ability to recruit a team of world-class people across product and engineering and marketing, amazes me still. So while it’s a lot of pressure, it’s also super fun and a great honor.

    How many people are using your surveys?

    There are 15 million who are sending [surveys] on an annual basis and interacting with our products in different ways. The vast majority are responding to surveys from people they trust, increasingly on a mobile device.

    We have a very detailed cohort analysis whereby people who try [the service] on a monthly basis tend to come on a somewhat transactional basis, and those who sign up for an annual plan — the longer they stay, the less likely they are to churn, and those are obviously our most profitable companies.

    Uber is one of your many corporate customers, correct? Are they responsible for those five-star ratings we’re asked to give drivers at the end of each ride?

    Uber is using a variety of [our] products, though I can’t say exactly which. I think the largest survey company in the world today is Uber. Today, every time you take an Uber, you take a .2-second survey where you’re rating your driver, and obviously those data points are helping inform them about which drivers are doing a great job, as well as [informing Uber about] the customers who drivers like. It’s using what we call people-powered data in a really refreshing way to drive their product forward.

    I always give drivers five stars out of some paranoid fear that if I don’t, there will be ramifications. Other people game surveys for their own reasons. How do you ensure these surveys are actually useful to your customers?

  • True Ventures Just Led a $12 Million Investment in Still-Stealth Brava

    team_portraitIf you’re curious to learn about the latest investment out of San Francisco-based True Ventures, you’ll have to be patient. Though the firm is disclosing that it has led a whopping $12 million Series A round in new startup Brava, details about the startup are scarce.

    What we do know: Brava is a new IoT company that plans to create a suite of domestic hardware and software products, beginning with a kitchen appliance that aims to make cooking easier. It also just brought aboard John Pleasants as CEO.

    If that name is familiar, it’s because Pleasants has led a number of digital media companies over the last couple of decades, including as co-president of Disney Interactive Media Group, COO of Electronic Arts, CEO of Ticketmaster, and most recently as an EVP at Samsung.

    Pleasants also spent a year as the CEO of Playdom, a social gaming company that was acquired for $563 million by Disney in 2010 (thus Pleasants’s role there). It was at Playdom where he met Brava cofounder Dan Yue, who went to high school with Brava’s other cofounder, Thomas Cheng.

    Yue was Playdom’s chief product officer and headed to Disney with Pleasants after the sale, logging a couple of years with the entertainment giant as an SVP of product. Cheng meanwhile cofounded the smart parking company Streetline and recently spent a year as the head of hardware at August, the smart lock company.

    Oh, and if you’re wondering where True Ventures fits into all of this, the firm sold an earlier portfolio company, social gaming startup Hive7, to Playdom back in 2010 and got to know Pleasants then.

    We had the chance to talk with Pleasants yesterday about Brava, which quietly came together about a year ago.

    More here.

  • Guild Education Lands $8.5 Million in Series A Funding Led by Redpoint

    screen-shot-2016-10-02-at-11-24-29-amAccording to a 2014 report from Complete College America, a nonprofit group based in Indianapolis, just 19 percent of full-time students earn a bachelor’s degree in four years at public universities. The stats are even worse at community colleges, where five percent of full-time students earn an associate degree within two years, and just 15.9 percent earn a one- to two-year certificate on time.

    Some of why students are taking longer to graduate centers on the lack of a clear planning, changing majors, changing universities, and taking unnecessary courses, suggests a variety of research. But Rachel Carlson, the cofounder and CEO of Denver-based Guild Education, says there are plenty of non-academic factors at play, too, including soaring tuition costs and shift work that can interfere with community college class schedules.

    Indeed, to help those many students who are working their way through college, as well as help companies that recognize the importance of helping employees realize their full potential, 16-month-old Guild partners with employers including Chipotle to offer education as a benefit, right alongside healthcare.

    How does it work?  The IRS already allows for employers to offer up to $5,250 annually of tax-free education to help any employee as long as the benefits “are provided by reason of their employment relationship.” Employers can also pay beyond $5,250 if they like, though employees generally have to pay tax on the additional amount. (Qualified employees can also apply for an additional $5,815 in available federal grants.)

    More here.

  • Luma Tacks on $7 Million from Andreessen Horowitz and GV

    screen-shot-2016-09-18-at-8-51-56-pmLuma, an Atlanta-based company that makes a sleek router with a wide variety of bells and whistles, has tacked on $7 million in funding to its coffers from Andreessen Horowitz and GV. The funding comes fast on the heels of a $12.5 million Series A round that was co-led in April by Accel Partners and Amazon and included participation from Felicis Ventures.

    Seemingly, investors are trying to get a stake in the company before the router wars begin to heat up further. “Unlike a smart thermostat, a wireless router isn’t option; it’s something that everyone needs,” notes Luma cofounder Paul Judge.

    Customers want something that’s more sophisticated than the routers of yesteryear, too, given how much more advanced tech has grown in other aspects of their lives. “The consumer network and IT at home has just been broken, and there isn’t a device or product that people are excited about to be the backbone of the connected home,” Judge says.

    Established companies like Asus, D-Link, and Netgear definitely get it. In recent years, they’ve begun layering in features like parental controls and the ability to prioritize traffic based on network and device. But they face fresh entrants that are going after a piece of the market with their own next-generation features. And no wonder: Roughly 170 million wireless routers are purchased each year.

    More here.

  • NFX Guild Just Introduced 13 Buzzy Young Startups to Investors

    nfx-guild-logo-bigThe young Bay Area accelerator NFX Guild hosted its third “demo day” yesterday at the Computer History Museum in Mountain View, and the attendees were a veritable who’s who of venture and angel investing.

    It wasn’t necessarily a surprise that roughly 200 top investors were sitting elbow to elbow to see the presenting companies. NFX Guild prides itself on being different that most accelerators in numerous ways, including that there’s no publicly available application process; startups are instead referred to NFX “scouts,” who happen to mostly be VCs. The last class, which passed through the program earlier this year, saw referrals from 42 people; this class involved 68 scouts.

    NFX was also founded by a trio of well-regarded entrepreneur-operators, including James Currier, Stan Chudnovsky and Gigi Levy Weiss, who provide NFX companies with $120,000, along with 30 hours of programming, mentoring and investor introductions. NFX in turn gets 7 percent of their company. (If the company has already raised more than $750,000, NFX asks for 5 percent.)

    Investors also seem drawn to NFX because its startups and teachings center around a narrow idea with very broad implications: the importance of network effects, a phenomenon when a product or service becomes more valuable to its users as more people use it.

    As far as NFX is concerned, any company, at any stage, can “add” network effects to multiply the value of their company. And Brian O’Malley of Accel Partners, who was in the audience yesterday, suggested afterward that he agrees. “Network effects aren’t just for social applications. We’re seeing this across our portfolio, but it was highlighted in today’s demo day that blockchain, SaaS, labor markets and more can benefit from core network effects embedded in product.”

    NFX-backed companies like the home remodeling and design platform Houzz and the event planning platform Honeybook are “nailing this model,” added another attendee, Jeff Richards of GGV Capital, saying, “We as a firm are betting big on this trend as well.”

    Click here to check out the companies that presented yesterday.

  • At Rothenberg Ventures, the Rise and Fall of a Virtual Gatsby

    Screen Shot 2016-08-29 at 9.40.19 PMRothenberg Ventures, the four-year-old, San Francisco-based seed-stage venture firm, may be on the brink of implosion, say several sources close to the firm.

    We reported yesterday that several high-level employees had parted ways with Rothenberg, including its director of finance and the head of its SF office, who happen to be father and son (Tom and Tommy Leep). We’ve subsequently learned that firm departures run far more widely. Other top executives who’ve left include the company’s chief revenue officer, who quit yesterday; the company’s chief financial officer, who left in June; general manager James Taylor, who left very recently; and Fran Hauser, a former president of digital at Time Inc. Hauser was brought in with some fanfare as a venture partner in May 2014. Yesterday she updated her LinkedIn profile to reflect that she left Rothenberg in July.

    Messages to Rothenberg have not been returned. According to one source, Rothenberg Ventures founder Mike Rothenberg has told those remaining that “very few people will be left.” In what appears to be a related development, the firm’s site has been down since last night.

    Why the mass exodus? According to one source, Rothenberg Ventures is answering questions from the SEC after a lower-level employee alerted the agency to what this person reported as wire fraud and breach of fiduciary duty. This same source says the employee was subsequently fired and is now suing the firm for retaliation.

    All SEC investigations are conducted privately. An investigation does not mean that the agency will file a case in federal court or bring an administrative action.

    Either way, a much thornier issue for Rothenberg Ventures, say numerous former employees, is founder Rothenberg himself, who has sometimes seemed to live more like a billionaire than the manager of a modest venture fund — spending lavishly to attract moneyed individuals as investors and, over time, growing increasingly focused on becoming as famous as some of them.

    Making a millionaire

    It all began as a minor but inspirational story, proof that the American Dream can still come true.

    Rothenberg, an Austin native who says he comes from humble means — “no one in my family has any money,” he once told us — was smart enough to nab undergraduate and graduate degrees from Stanford, then bootstrap a real estate fund with his brother before moving on to Harvard to secure an MBA.

    Soon afterward, inspired by business leaders he had met while at Stanford, Rothenberg planted himself in San Francisco and got down to the business of trying to shake up the stodgy venture industry. Step one involved raising a $5 million fund from “friends, family, and former roommates,” as reported in a Bloomberg story about Rothenberg last year.

    His timing was ideal as these things go. In 2012, the market was in the middle of a three-year upswing, following the financial crisis of late 2008. Some newer faces were also beginning to gain prominence in the venture industry, along with the trust of so-called limited partners — the individuals and institutions that fund venture firms.

    Rothenberg is also a natural salesperson, and, as such, quickly evolved his pitch for Rothenberg from yet another seed-stage fund to a thought-leading outfit willing to make big bets on virtual reality before most people in Silicon Valley saw it as a major opportunity.

    More here.

  • Pejman Mar Raises $75 Million for Second Fund, Rebrands as Pear

    2team_pearLikability, intuition, and a strong work ethic is a potent combination in any business, and many in Silicon Valley think seed-stage investors Pejman Nozad and Mar Hershenson have all three in spades. They “complement each other,” says investor Alfred Lin of Sequoia Capital, who invested in the Series A round of DoorDash, the restaurant delivery company, after they seeded it.

    Indeed, the duo has already become somewhat for working closely with nascent teams — many of them in their backyard at Stanford — and vetting them for other VCs, who appear to have an open invitation to their modest offices. (This editor has spied many an investor milling about during different visits, including Bryan Schreier of Sequoia Capital, Mike Abbott of Kleiner Perkins Caufield & Byers, and Brian O’Malley of Accel.)

    Nozad and Hershenson have admirers at much bigger institutions, too. In fact, today — almost exactly three years after the two launched a $50 million seed-stage fund under the eponymous moniker Pejman Mar Ventures —  they’re taking the wraps off a second, $75 million fund. They’re also scrapping their name and rebranding the firm as Pear.

    Among Pear’s investors is New York Life Insurance, True Bridge Capital, and the University of Chicago, which also contributed capital to the firm’s debut fund. The school is back a second time because Hershenson and Nozad have “one of the most partnership-focused mindsets I’ve seen,” says Joanna Rupp, managing director of the University’s $1.1 billion private equity portfolio. “That extends to their limited partners [like us], general partners at other venture firms, and entrepreneurs.”

    Certainly, Pear appears to think differently, which can perhaps be traced to its unusual roots. Nozad famously sold rugs to tech millionaires before becoming a full-time investor; one early bet was on the early smartphone company Danger, which sold to Microsoft in 2008 for $500 million. As it happens, it was through Danger that Nozad met Hershenson, a three-time entrepreneur whose husband cofounded the company.

    Unlike other venture outfits that orchestrate expensive dinners with journalists, Pear organizes events at its offices for cash-strapped founders and students that feature VCs and renowned CEOs as speakers. Past guests include John Doerr of Kleiner Perkins, Yahoo cofounder Jerry Yang, investor Chamath Palihapitiya of Social Capital, and Zynga founder Mark Pincus — though Nozad says a more popular attraction is a life coach who comes regularly to help founders with their personal problems.

    More here.

  • Exits and Commitments

    Semil ShahBy Semil Shah

    Today wraps up the third summer I’ve had the luxury (and wielded the power!) of being a guest curator for StrictlyVC while Connie takes some well-deserved R&R on the beach with her family. This year, along with the standard Q&A’s with fellow investors, I’ve been reflecting on my few years as a small investor. Last Friday, I tried to collect and synthesize the questions I’ve received over the years about starting a fund as an “FAQ.” This Friday, I’ve been thinking about exits.

    The job of a fund manager, beyond allocating capital and helping those founders along the way, is to return capital. It’s ultimately the only thing a manager is judged on, professionally speaking. Everyone reading this newsletter already knows that. Yet, on this judgment metric, managers aren’t often in control of how or when those events occur. It typically takes Fund 2’s and 3’s to see what works, and yet, as the old adage goes, past performance is no guarantee of future performance.

    For newer, smaller funds like mine and many others, folks hope for public offerings down the road, though lately those outcomes feel harder to come by for a variety of reasons. Folks also hope for large acquisitions, and while many investors believe those may pick up over time, large ones are rare. Then there are secondaries and partial stock sales to newer investors from larger investment firms that have higher thresholds for ownership targets in their fund models.

    Investors and pundits chatter enough about an IPO or the large acquisitions they’re involved with or monitoring, but secondaries are not typically discussed for a host of reasons: reputation, private information, signaling, etc. I was afraid to discuss the topic myself until I realized they happen quite frequently, that secondaries have been discussed openly by one of the best venture investors in the world, and that they aren’t that big a deal for smaller funds that aren’t “an investor of record” in a company. (I should be clear here in stating that the investors who take concentrated positions in companies, join their boards, and manage larger funds have many reasons not to engage in secondaries because they need to play for a larger outcome, and any shuffling of a syndicate can be interpreted as a potentially negative signal by the private market.)

    Secondaries do not magically occur, however. They require creativity, patience, and, most importantly, the acceptance of other people in the deal on the table, including the existing investors, the new investors, and, of course, the CEO. The early investor has to ask for permission. He or she has to explain their rationale honestly. Signatures need to be collected. He or she still helps out, too. The relationship doesn’t end, and often it’s the companies helping the investor out more than the other way around.

    These decisions, I’d argue, are not necessarily intuitive for most small fund managers, most of whom do not have experience managing institutional money. Whereas most very early-stage decisions are made without much data, decisions to sell in future rounds when companies are doing well require an entirely different level of analysis. I can only speak for myself, but I’ve found that process significantly more challenging and the learning curve steeper.

    Still, secondaries are still comparatively easy for small funds to execute if they really want to. The absolute dollars at issue are often not material enough to arouse emotions. It’s considerably harder for bigger funds with classic partnership structures, whose general partners may make one to two new investments per year, sit on boards, and continue to follow-on in their investments all the way to the finish line. Larger funds often can’t, like smaller funds, invest in a bunch of companies per year and see what happens; they have to be selective and commit for a longer period of time. They often can’t, like smaller funds, scale down their ownership because those signals may negatively impact a specific company. They often can’t, like smaller funds, not maintain ownership because their fund sizes require large outcomes.

    I’m not saying these larger VC firms are saints or always helping out, but it’s a complicated dynamic that’s often overlooked or dismissed in the current environment of exploding company creation and exploding new fund formation. We should keep in mind the commitment of those founders and their early VC investors who take on and embrace long-term risk. Three years into the game, that’s most of what’s on my mind.

    Thanks for reading, and welcome back, Connie!

  • A “Should I Raise a Fund” FAQ

    Semil ShahBy 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!

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