How to Start a Venture Firm

On February 16, 2013 by Alexander
First of all, I wouldn’t do it. Venture capital is a very difficult place for anyone to start out. New firms can take years to raise their first fund and that’s no guarantee of a second fund. Moreover, the venture market is consolidating and even established firms are having a tough time raising follow on funds.

But Suppose you’re truly committed to a path of pain with a dubious probability of a payoff….what then?

  1. Get letters of recommendation from awesome people. Andreessen Horowitz got letters from John Doerr and other well-known VCs that they could take to potential limited partners as a strong endorsement of their potential success.
  2. Focus on limited partners with an “emerging managers” program. Some large institutions set aside a pool of money to support the creation of new firms and will actively look for prospects that have no track record.
  3. Use your own money. Suppose you made a bucket of money from selling a startup, you could use some portion of that money to become your own anchor investor. Other investors may be attracted to the fact that you have serious skin in the game. Alternatively, you can use your own money to establish a track record of successful investments and then open your firm up to outside investors for a second or third fund. It worked for the Founders Fund.
  4. Start small, score, repeat. Emergence Capital started with a small investment into a single startup. The firm scored big when that startup, Salesforce, went public. It leveraged that success and the profitable relationship its partners had with Marc Benieoff to attract other entrepreneurs and investors.
  5. Start inside a corporation and spin out later. Several firms have started inside large corporations and later spun out, keeping their corporate parents as an anchor investor and attracting other limited partners to fill out the fund. Bluerun Ventures spun out of Nokia. Relay Ventures spun out of RIMM. Branding and continuity can be tricky, but this has worked in the past.
  6. Diversify your investor base as quickly as possible. New firms can go under when an anchor investor stops supporting them.
  7. Get money from friends, family and successful entrepreneurs. It helps to be well connected, but it’s even better if you can get money from someone with a positive brand.
  8. Demonstrate a history of the investment team working together successfully in the past. Strife among partners is a common problem in venture firms and something that really scares limited partners. Andreesseen and Horowitz worked together at Opsware, which certainly inspired confidence that they’d be able to work together again.
  9. Go in with reasonable expectations. I talked to one firm that took two and a half years to raise its first fund. I know another that’s on its third year of active fundraising without hitting its target. Fundraising takes time, large limited partners move slowly and often take multiple meetings before becoming convinced.

Again, my advice is simply don’t do it. Successful first time funds are outliers, special cases that are hard to replicate. I cover how venture capital firms raise funds extensively in my book “Essentials of Venture Capital.” Check it out on Amazon: Essentials of Venture Capital

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