5 innovative fundraising methods for emerging vcs and pes

Capital Raising Strategies for Venture and Private Equity Funds

Securing funding from institutions for venture capital or private equity funds typically follows a well-defined process. However, attracting capital from family offices and high-net-worth individuals requires a different approach.

Emerging managers, like Versatile VC, are currently employing five innovative capital raising methods. These are presented below, generally ranked from most to least commonly utilized.

Innovative Capital Raising Methods

• Online Communities & Virtual Conferences: Engaging with investors through online platforms and virtual events is proving effective.
• Investor Access Platforms: Utilizing platforms designed to connect fund managers with potential investors can broaden reach.
• 506(c) General Solicitation: Leveraging the 506(c) designation allows for general solicitation of investors.
• Rolling Funds: Launching a rolling fund structure offers a continuous fundraising mechanism.
• Retail Investor Crowdfunding: Directly soliciting investments from retail investors into the fund’s general partnership is a newer approach.

Effective outreach to family offices often necessitates a pre-existing relationship. Will Stringer, CEO of Chisos, emphasizes that cold outreach is generally unsuccessful.

Building trust is paramount when dealing with family offices. Stringer notes that they heavily rely on trust and warm introductions from trusted sources, such as other general partners.

Cultivating relationships with individuals who have previously secured funding from family offices can be beneficial. Alternatively, professional intermediaries can facilitate introductions.

Despite the importance of relationships, the following five methods offer potentially quicker and more streamlined avenues for capital acquisition.

Networking with Investors Through Online Platforms and Virtual Events

To connect with potential Limited Partners (LPs), consider joining online communities like Confluence, Gen Z Mafia, InnovatorsRoom – which focuses on the European market – and TechAviv, geared towards Israeli investors. Further resources for finding suitable communities can be found in guides on identifying the right online groups.

These platforms offer an efficient way to present your fund to a pre-qualified audience and initiate contact with investors who appear well-suited. The most effective online communities are often exclusive to LPs.

Ideally, establishing a relationship with an anchor LP or a friendly investor can facilitate introductions to other prospective backers.

Maximizing Virtual Event Participation

When attending virtual conferences, prioritize completing your online profile with relevant keywords and a professional photograph. Utilizing side channels for private conversations is highly effective.

Before and during the event, research attendee profiles and send personalized messages to individuals who align with your fund’s focus.

Virtual events offer a distinct advantage over traditional conferences, as attendees’ professional information is readily accessible.

The Power of Insightful Questions

During public forums, aim to ask questions that demonstrate thoughtful analysis. A simple request for information differs significantly from a probing inquiry that reveals deeper understanding.

For example, asking "When did the first COVID-19 deaths occur in the USA and South Korea?" seeks factual data. Conversely, questioning "Why did the USA experience 79 times more COVID-19 deaths per capita than South Korea?" indicates critical thinking and prior research.

Asking such insightful questions signals to other attendees that you’ve thoroughly prepared and are capable of advanced analysis.

Follow-Up is Crucial

Prompt follow-up is essential, as it’s often interpreted as a measure of your commitment to building new relationships. The primary objective of attending virtual events is to secure one-on-one conversations with relevant individuals.

However, it’s important to be mindful of legal restrictions regarding general solicitation, unless you are actively pursuing a general solicitation strategy.

Leveraging Platforms for Investor Access

A variety of platforms facilitate fund access for both institutional and retail investors. These include Allocate, CAIS, Context365, iCapital Network, OurCrowd, Palico, PrimeAlpha, Revere, and Trusted Insight.

Additional firms providing access to both direct investment opportunities and funds are iSTOX, Sharenett, Manhattan Street Capital, Proteus, and Yieldstreet.

Platform Efficiency and Track Record

Utilizing these platforms offers an efficient method for reaching a substantial pool of pre-qualified investors. However, a demonstrable track record and a concise investment narrative are typically essential.

Fund managers lacking a clear performance history, particularly those not emerging from a previously successful fund, may encounter difficulties securing capital through this approach.

Cost Considerations

Platform costs vary considerably. Fees may be structured as a percentage of management fees, a portion of carried interest, a one-time upfront payment, a recurring monthly charge, or a combination of these.

Utilizing Rule 506(c) for Capital Raising

Generally, employing the 506(c) designation for solicitation is advisable. ff Venture Capital pioneered the use of “general solicitation” for institutional VC funds when I was a partner there.

Rule 506(c) permits capital solicitations exempt from certain reporting requirements, mirroring rule 506(b) – the conventional fundraising method – but expands outreach to the general public, including through advertising.

The Benefits of General Solicitation

Rob Leclerc, founding partner at AgFunder, highlights the advantages, stating, “We’ve utilized Reg D 506c for the past four years in raising our venture capital funds, primarily because it minimizes restrictions on our communications.”

He further explains, “Advertising is a standard practice for businesses worldwide, even those selling high-value products like Boeing’s aircraft. Investment funds should not be excluded from employing similar marketing strategies.”

It’s important to note that even with a 506(c) offering, fund managers retain control over investor allocation and minimum investment amounts.

An illustrative example of managing LPs during a 506(c) raise can be found in McKeever Conwell’s breakdown of his technology stack.

Potential Drawbacks of General Solicitation

General solicitation introduces the obligation to verify investor accreditation through documentation like tax forms and bank statements. However, this verification process can be outsourced to services such as VerifyInvestor.com or EarlyIQ for as little as $60.

Engaging with a large number of potential investors is also required, many of whom may not be genuinely interested, potentially consuming significant time and resources.

Finally, raising capital for a fund involves marketing a luxury good, the perceived value of which is often linked to its scarcity. This exclusivity is a key factor in the success of the hedge fund industry, and general solicitation could potentially diminish this perception.

Rolling Funds: A New Investment Model

The concept of rolling funds has gained prominence, largely due to its popularization by AngelList and their Rolling Venture Funds. Several prominent investors have adopted this structure, including Naval Ravikant, Sahil Lavingia, and Dave Morin, alongside firms like Diaspora Ventures and W Fund.

Resources offering detailed insights into rolling funds include articles such as "Will rolling funds roll over the venture capital industry?", "Rolling venture funds through the good times and the bad," and "Rolling funds — welcome to the uncommitted LP." A contrasting perspective can be found in "Why we ultimately decided not to do a rolling fund."

Replicating the Rolling Fund Structure

While AngelList streamlines the process, it is theoretically possible to recreate the rolling fund structure independently, potentially reducing associated costs.

The legal framework of rolling funds has been thoroughly reviewed by The Fund Group at Wilson Sonsini, and they are capable of replicating it for interested parties.

Bryant Smick at Carney Badley Spellman has also been involved in the creation of similar fund structures.

Fund Administration and Compliance

AngelList utilizes Belltower Fund Group to handle essential administrative tasks. These include accounting, tax reporting, and maintaining the fund’s ledger of Limited Partners (LPs).

AngelList functions as the Investment Adviser, collaborating with fund managers to guarantee equitable and consistent treatment of LPs. This involves conflict checks, information verification, and adherence to all applicable legal and regulatory requirements, as detailed by Chris Harvey in a Law of VC post.

Belltower Fund Group could also potentially provide these administrative and compliance services independently.

• Key takeaway: Rolling funds offer a novel approach to venture capital, and their structure can be replicated outside of the AngelList platform.

Securing Funding for General Partnerships Through Retail Investment

Crowdfunding presents a viable avenue for general partnerships to raise capital, as demonstrated by Backstage Capital’s successful $5 million campaign on Republic. Similarly, Earnest Capital and Chisos Capital are currently leveraging Regulation CF (Reg CF) offerings, a strategy analyzed by Sacra.

According to Will Stringer, these platforms serve a dual purpose. They function not only as fundraising tools but also as effective marketing initiatives, exposing the offering to a broad audience. This exposure can generate leads, connecting the partnership with potential investors and entrepreneurs.

A significant benefit lies in cultivating a large investor base. These individuals become invested in the partnership’s success and that of its portfolio companies, forming a community eager to contribute through talent sourcing, problem-solving, and introductions.

However, Stringer cautions that managing a large number of investors requires considerable effort. While platforms typically offer tools to streamline communication, the administrative burden is greater than managing a smaller group of general partner (GP) investors.

It’s important to note that raising capital at the GP level addresses operational expenses like salaries and legal fees, but it doesn’t directly increase the fund’s investment capital. The funds raised through these methods cannot be deployed into portfolio companies.

The associated costs can be substantial, and the outcome is closely tied to the existing strength of the partnership’s network. Firms with established brands and extensive networks, like Backstage Capital, may require minimal marketing expenditure.

Important Considerations

• Marketing Costs: A strong existing network can significantly reduce marketing expenses.
• Investor Management: Managing a large investor base requires dedicated resources.
• Capital Allocation: Funds raised are for operational costs, not investment capital.

Disclaimer: I hold an investment in Republic through HOF Capital, where I previously served as a managing partner. I acknowledge Prabhat Gusain’s contribution to the research supporting this analysis. Please understand that I am not a legal professional, and this content should not be construed as legal advice. This piece summarizes a course I delivered for the Oper8r VC fund accelerator.