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So We Raised a $180,000,000 Venture Fund. What I Learned, by SaaStr

Stashed in: Venture Capital!, @hunterwalk, @msuster, Venture Funds

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Jason Lemkin's points 3, 4, and 5 are eye-opening:

3.  There isn’t nearly as much money going into venture capital funds as you’d think.

It seems like a new fund is raised every day, and it almost is.  Because Times Are So Good, almost every venture fund is “going to market” (i.e., trying to raise another fund) this year or did last year, or in some cases, did last year and is again doing so this year.

But, the numbers are distorted.  First, the huge late-stage, unicorns rounds aren’t being done by traditional VCs, at least not primarily.  You’ll see mutual funds and special very late stage investors leading these investments, not the traditional VCs.

My best guess is that the amount of capital committed to traditional venture capital has gone up by maybe 50%.  And it’s really less than that in some ways, because the successful firms are raising larger funds, which means they’re sucking up a lot of that increase in the category ..

which means …

4.  It’s really, really hard to raise a new fund and break into the industry.

The vast, vast majority of capital out there that is going into venture funds is already pre-allocated.  It’s already going to the next fund at Sequoia, at Benchmark, at Andreeeesssen Horowitz.  It’s pre-allocated.  And if those pre-allocations are in VC firms raising larger funds, and more funds … that can suck up even more of the limited pool of available LP capital.

So what’s left?  To raise a fund if you aren’t Sequoia today, my learning is you have to be in one of two categories.  You either have to have those consistent, top 20% results and have committed LPs (results alone, surprisingly, aren’t enough) … or you have to be “potentially hot” in a new / emerging area.

LPs do reserve a chip, or in some cases, a portion of a chip, to experiment on funds that might be hot because they have unique value propositions.  Firms like Homebrew were constantly mentioned to me by LPs that wanted to take a chance on a UVP (Unique Value Proposition), and in a similar vein, folks wanted to take a bet on Mark Suster and Upfront not just because of some strong investments and returns, but also in large part because of his dominant position in L.A. tech.  I’m in awe of the hustle of guys like Charley O’Donnell of Brooklyn Bridge Ventures.

But if you don’t have a Top 10 Brand, Don’t Have Top 10% Results Already, and Don’t Have a Truly Unique Compelling Value Prop — Forgetaboutit in raising a new fund.

Put simply, really, it’s a whole lot easier to raise a Seed Round, a Series A, and a sizeable Series B, than it is to raise even a small venture fund.  A whole lot easier.

5.  It’s Like a Big But Super Slow Party Round.

As a CEO, you really only need one lead VC at a time.  In raising a venture fund, you probably need 3-5 leads and say 15 total investors (at least) at a time. We were fortunate in that all our key prior investors stepped up and invested more in Storm V than IV, which in the end, made it relatively easy (THANK YOU!).  But one or two leads (or “anchors”) aren’t enough.

LPs do come and go as priorities change.  Your champion at Big LP leaves before the next fund, and the interest dwindles.  The LP decides to no longer do venture as a category.  Whatever.  Things change.

So you’re going to have some turn-over.  Because of that, traditional thinking is to have no LP invest more than 10% of the fund, 15% max.  That means 10-15 “investors” minimum.

And many LPs want to go last into the round — at least, as last as possible so long as they can get in.  Since 15+ folks will get a shot at investing, in an ideal world, you’d go last, get that last little bit of social proof, that extra data.  You’d be #15.

See also Jason Lemkin's post on why VCs need unicorns just to survive:

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