This post is part of our Emerging Manager's Guide to Fundraising. Download the full guide for more best practices to launch and scale your fund.
Vector AIS COO, Kristina Dayback, has seen every operational mistake a fund can make. We asked her what advice she has for emerging fund managers to avoid making them.
What are the biggest operational or GTM mistakes you see first-time fund managers make? What advice would you give them to help avoid making those mistakes?
There are a few that stand out to me the most.
Not sticking out from the crowd or sticking out for the wrong reasons. From what I have seen, a lot of first-time fund managers rely very heavily on projected return models during fundraising to prove their thesis or investment strategy. However, anyone can put together an Excel model, put a few lofty numbers in, and hypothetically return 100x committed capital. The big question potential investors will have is why YOU? What experience do you bring to the table? How are you going to get deal flow that others can’t? What is your investment track record?
Don’t stick out because you are trying to get too creative with fund terms. The 2/20 methodology is industry standard for a reason, especially with emerging managers. Don’t make it unnecessarily hard on your fundraising by straying too far from the norm. This isn’t saying you shouldn’t ever customize your agreement or fund terms, but make sure you aren’t putting yourself in a position where a potential investor needs to choose you and agree to terms that might not coincide with your track record.
The biggest operational mistake that I’ve seen that comes back to haunt GPs later in life is not planning for all 10+ years of the fund’s life, both in terms of cash planning and developing the right partnerships. Make sure you don’t over deploy your capital in the first few years of the fund. Plan for your fund to last close to 15years and understand that close to, if not more than, 25% of your committed capital will go towards fees and expenses.
Make sure you choose the right partners (admin, audit, tax, legal, etc.) that will not only help you operationally plan your fund but ones that will grow with you along the way. You should be able to rely on your partners as thought advisors. Make sure you do the right diligence and choose teams that have expertise in your area.Choosing the right ecosystem is one of the most undervalued, yet important, decisions you will have to make.
What most excites you about working with fund managers?
Most fund managers really embrace the partnership aspect of fund administration. Being counted on to help think out satisfying aspects of the role. It’s very exciting to have even the smallest part in new ideas, technologies, and innovations. It’s even more exciting to watch those ideas materialize into real companies that change the way we look at the world.
What’s your take on the current state of fundraising for emerging managers?
It depends on what we compare it to. If we are talking 2-3 years ago, obviously it has slowed down quite a bit. It’s easy to compare now to then and think the fundraising world is coming to a halt.
However, if you compare it to prior years, it’s about right on par with what we are used to. It felt like everyone was successfully raising, and oversubscribing, their first venture fund in 2020-2021with little to no track record and doing it in record time. Those days are long gone, and that might not be the worst thing. It will be interesting to see what the average performance will be for funds with those vintages, and how many Fund IIs come out of it.
For now, we are back in a world where it is going to take 18-24months and a history of successful investing or unique story to raise your first fund. A lot of funds will most likely be smaller than their initial target size and very few first-time funds will be oversubscribed. This isn’t a big red flag though. It’s historically what has transpired in the industry. The good news is, there are still plenty of investors who want to write checks and people are still successfully raising funds.
Over the course of your career, what’s the biggest change you’ve seen in the way funds operate?
The biggest, most exciting, change that I’ve seen since I started in the venture/PE world almost 20 years ago is more demographic-related rather than operational. It was almost unheard of back then to have a fund based out of anywhere other than SanFrancisco/Palo Alto, and if you weren’t based there, you were most likely going to be in New York. It’s refreshing to see funds pop up based in the Midwest, Florida, Texas, etc. and investing indifferent regions throughout the states.
While there is still a long way to go, there also has been more of a focus on diversity, both in terms of general partners, founders, and board members. We are not nearly where we should be, but it was barely, if at all, talked about 15 years ago.
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