You have equity capital in your industry and access to startups. You know the main investors. You’re smart, you’re in a hurry, you know what it takes. It’s almost inevitable, and maybe even your destiny: you’re going to be a VC. So you ask the venture capitalists you know: How do I raise my first fund? You ask me, Caterina Fake, and my answer is counterintuitive: don’t do it.
Don’t start by raising a fund.
Start with SPVs.
SPVs (Special Purpose Vehicles) are an underrated and overlooked way to get into venture investing. SPVs are much faster to raise than a fund, easy to set up, and best of all, they generate returns faster, because fees and carry are paid on a deal-by-deal basis. Good for business, good for investors, and good for you, the future VC.
Venture capitalists see SPVs as a trivial league, because they are not “real” funds, but their profits are just as real. They are a disruptive gateway used by many fledgling and experienced venture capitalists to outperform their slower-moving peers, access otherwise inaccessible opportunities and, if all goes according to plan, ring the bell on the stock market. New York or light your cigars. with $100 bills.
Y Combinator invented SAFE so the founders could raise capital in smaller chunks and do it faster. It revolutionized fundraising. SPVs are like SAFE to VCs.
What makes SPVs so useful? Consider: VPSs are inexpensive and easy to set up on a variety of platforms, including AngelList, Canopy, Assure, Carta, Republic, Flow, and Stonks. (Full disclosure, Stonks and Flow’s parent company, Dapper Labs, received funding from my company, Yes VC.)
A standard VPS on AngelList takes a couple of days and costs $8,000. Meanwhile, a traditional fund, which involves the formation, drafting of agreements, and incorporation of LPs, typically takes months and can add up to tens or even hundreds of thousands of dollars in legal fees.
You can market SPVs to a much broader pool of investors than a traditional fund, attracting non-institutional investors (family offices, HNWs, any accredited investor). They like SPVs because it’s like investing directly in a company, except you do the hard sourcing work, build relationships, and close the deal for them; they can only choose.
Founders also like SPVs, because they attract a pool of investors who can be useful to them, SPVs can be closed quickly, and SPVs don’t clutter their cap table. Founders will often send investors your way, say friends and family, small checks, potential advisors, and investors who didn’t make it in the last round.
On your way to building your fund, SPVs are also a great way to build a track record, grow your AUM and LP networks, and gain a foothold in today’s hyper-competitive marketplace. You can introduce the SPV to HNW, family offices and other investors without requiring them to commit to a blind group, yet.
You can even de-risk your future general partnership by doing SPV first. Silicon Valley is riddled with horror stories about venture capital firms whose GPs don’t speak well or who are in the destructive and costly process of firing a “key person.” Working with a partner doing some SPVs together and splitting the carry will help you see if they like working together. With a fund, GPs are practically locked up for life. Date before getting married!
Interesting offers? The best deals? Awesome deals? Deals you just know are going to be huge? SPVs let you go after them. You’re not cornering yourself with a predefined scenario, strategy, or bullshit thesis that exists just to woo some reluctant LP. You can develop a specific, battle-tested story or thesis backed by your SPV track record. Prolific angel fundraisers are often surprised when LPs shrug off their angel investment record. They don’t realize how important it is for LPs to see someone who has consistently raised pooled vehicles and deployed pooled capital successfully, reliably, and with a strategy. SPVs take you out of the bucket of angels and into the pooled investment manager category.
Once you’ve made a few SPVs, you can move on to launching a traditional fund from a much stronger position. Add up all those SPVs and you already manage significant AUM. Some of the SPV investors will join your fund, now that they are familiar with your investment style, your deals and your hustle and bustle. Potential LPs who just joined the party can call their SPV investors to check their references. There are so many wins here, I’m losing count.
Also, starting a venture capital fund requires liquidity. Many first-time GPs go without pay for a year or more while they raise their first fund, and then have to fork out their first GP commitment, sometimes hundreds of thousands or even millions of dollars. Some first-time GPs are forced to take out loans to pay for their own GP commitments. It’s also common to invest in your own SPV, but you can start with a much lower amount (tens of thousands of dollars or even single-digit thousands), and if you need to pay rent or child care, you can extract a commission. in cash from its investors the instant the SPV closes.
However, the most important advantage for a newbie is speed. He can take two years to raise a fund for the first time. That’s two years of your life dedicated to releasing skeptical institutional LPs who’ve seen it all. You cannot make a single joint investment until you complete your initial closing, unless you self-fund. SPVs work the other way around. You’re already investing, because you find the deal first, then investors (and founders) will often help you get started by directing people who are already excited about investing in your company to do so through your SPV.
Are there disadvantages? There are always disadvantages.
One drawback to an SPV is that once you and the founder agree on the allocation and terms, and close a deal, you’ll need to raise capital in the SPV quickly so you don’t lose the deal. But this can be good! Forces LPs to commit immediately.
Another possible drawback is that some of your joint venture investors will find your SPV annoying, since you are taking away a valuable allocation. But with the founder’s support and adding value, you can justify your share of the pie.
Access to capital also gets easier with each SPV you do, because any investor who invested in your first deal (if it’s a good one) is more likely to invest in your second and third as well. If you have constant access to great deals, a single well-crafted Signal or WhatsApp message summarizing the opportunity, sent to your LP pool, can get your VPS oversubscribed in minutes. I’ve seen it happen! A lot!
So walk before you run and reach your goal faster.
Don’t raise a fund first. Pick it up second.