What it’s like to raise money for a fund
Last week we addressed accelerators as risk-reducers.
Accelerators, in general, are not for every fund.
When you decide to found one, they act as security-buffers to protect your investors.
This week, we delve into the world of fund-raising, specifically for VC and PE funds.
As you might remember, there were two main entities to choose from:
- Venture Capital funds, which deal mostly with high-tech
- Private Equity funds, which deal mostly with traditional industry
Both funds, for the sake of this argument, are treated the same way:
They both raise funds.
They include different agreements and arrangements.
The funds have savvy teams behind them.
So here are the 4 things you need to know before raising money for a fund:
Raising funds 101
Startups raise money individually.
Funds raise money for ecosystems.
They are essentially different, yet similar – they both need funds to operate.
Startups can be bootstrapped.
Funds need Ultra High Net Worth Individuals (UHNWIs) or Funds for Funds (FFs) to do so.
Startups require $300,000-$500,000 to leverage.
Funds require at least $30MM to invest in startups.
It means that requirements from both are similar but different, especially legal ones.
So, what it’s like to raise money for a fund?
A legal blunder
Startups raise funds with pitch-decks.
Funds have business plans, Private Placement Memoranda (PPMs), Subscription Agreements (SAs) and more.
It means that it becomes costlier to even consider founding one in the first place.
Finding lawyers who work on “hour-banks” to write down 350-page-worth of agreements is tricky.
The average lawyer charges between $10,000-$40,000 for a PPM alone.
Just imagine how much you would need to pay before you even started raising any money (!)
There is no “I” in “TEAM”
Pre-seed startups don’t always have a dedicated team.
They only need vision.
Funds cannot operate on “vision” alone.
They need a dedicated team.
A team which is savvy.
The team is made up of individuals who raised money before.
A team which has a board of advisors and directors who know the ins and outs of the business.
How long does it take to raise funds for one?
Raising funds for a fund takes a little longer than raising for a startup.
Even if all documentation is in front of the would-be investors, it could take up to 24 months to raise funds.
The initial funds may be allocated within 4-7 months on average, but the entire amount will be dispersed on 24 months usually.