Fundraising as an entrepreneur is tough, even in the best of times, but fundraising as an emerging venture capital (VC) fund manager is even harder. The majority of capital invested in start-ups across Europe, including Central and Eastern Europe, comes from venture capital firms, many of which are deploying capital out of their first, second or third fund vintage (and therefore are classed as ‘emerging’).
Fund return data suggests that a VC fund’s performance does not necessarily correlate to their vintage year – a new team’s enthusiasm and drive can have a material impact on their success. However, the fundraising journey for a new fund can be especially challenging due to the lack of a solid track record, making diligence more time consuming and the difficulty in identifying and developing strong LP relationships
Requirements by some institutional limited partners (LPs) for a minimum ticket size (say, 10 million euros) and a maximum allocation of the total fund (say 10 per cent), rules out any VCs raising less than 100 million euros before they even begin.
Potential limited partners can be found in a number of free databases, such as Preqin and Pitchbook, who provide information on investors of all shapes and sizes. Whilst contact details are likely to be out of date and responses to cold emails limited, the fund information is often accurate and can be used to identify relevant prospects.
You can leverage your existing network; either through direct connections or through requests for introductions to relevant LPs and don’t underestimate the power of a targeted referral. Placement agents can introduce you to relevant limited partners and family offices in their network, but many require significant retainers to take you on.
There are also conferences, webinars and networking opportunities across Europe that can help you connect to relevant investors. Examples include the 0100 conferences, which are now operating fully remotely, and Funding Venture, by Mountside Ventures.
But engaging limited partners is only one step. You then need to convince them to part with their cash and entrust you to generate supersized returns. How do start-ups pitch to you? What feedback do you give them? The best VC decks very much mirror the key areas you expect start-ups to focus on.
When setting up the fund you need to understand the problem you are solving as you need to show a real need for your investment proposition. The critical determinant in choosing whether you invest in a start-up tends to fall to the founding team. An LP’s decision to invest in your fund is also a decision to invest in you. What domain expertise do you have that makes you the right team to source the best start-ups in Europe? You’re more likely to raise if you can team up with partners who have a mix of operational and investment experience, who can commit 100 per cent of their time, and with clear separation of duties.
Think target market and ensure that your thesis is clear and relevant. Are you a generalist VC or targeting a particular vertical? Your thesis may change during your raise if you find a lead investor with a particular sector interest, so you’ll need to balance their interests with yours. Consider the implications of restrictions that your LP may ask of you, as these may limit your ability to invest in deals in the future.
When accessing the best entrepreneurs, avoid buzz words like ‘proprietary deal flow’. Instead, explain the partnerships that you have built over the years and why you get to see deals before everyone else. Focus on why entrepreneurs will want to partner with you rather than another investor. You will need to balance sourcing high potential startups to show LPs your access and being honest with entrepreneurs on your lack of committed capital. Leverage this to drive momentum with LPs, with companies ready to go.
You will need to produce a financial model showing your portfolio construction strategy. Consider how many companies you are going to invest in, how much capital you are going to reserve for follow-on investments and your typical cheque size. Although the model will be theoretical at this stage, you need to be able to walk the investor through it, connecting it back to your go to market plan and with evidence based on your track record.
Your track record is the most important area for all fund managers, regardless of their fund vintage. You need to be able to articulate your collective experience of investing in start-ups and their paper on paper returns (such as later stage funds following-on), and if available, cash on paper returns (evidencing early exits). Use angel investments as evidence of your ability of identifying high performing companies and show the increased valuation that came as a result of the value you provided and your ability to pick the winners. Be prepared for LPs to speak to entrepreneurs about your claims.
Your fund terms will send a signal to your potential investor. How much capital is the team personally investing as their GP commitment? You’ll want to commit between 1-3 per cent. Are you going to propose a management fee break after deploying or are you going to argue that the work really starts after you’ve invested to get them an exit? The very best VC funds certainly think so. Including a hurdle rate? Some investors believe you either succeed or you’re out the game. Offering preferences to your lead investor or giving preferential rights, rewarding those who are first to commit? You may consider doing a first close or investing on a deal by deal basis in order to start building your track record as soon as possible.
And finally, don’t forget the elevator pitch! You’re unlikely to take a meeting with a founder who can’t articulate their value proposition in 30 seconds, why should an LP take you seriously if you can’t do the same?
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Emerging Europe and Mountside Ventures are both partners of the Virtual PE & VC Conference – CEE Region, organised by 0100 Conferences, scheduled for June 25. Click here for more information and to register.
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