“Raising a venture fund versus starting a venture franchise?”

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It’s an immutable fact that delivering strong returns are necessary in building an enduring venture franchise. In my last post, I discussed the three important components of investing (sourcing, picking, and winning) and how managers should assess their differentiation around those items.

Most new venture managers consider these elements of investment strategy before launching, but other key basics of running a venture franchise don’t often receive enough consideration at the front-end.

Just like any company, a venture firm has multiple constituents to manage: shareholders (LP’s), clients (portfolio companies), and partners (co-investors, service providers, etc.).

When talking with aspiring venture managers, I often hear “I want to raise a fund” rather than “I want to build a great venture franchise”. Although perhaps I’m being overly nuanced, the latter statement creates a more appropriate mental framework when contemplating getting into venture. While fundraising and investing are key components of a new fund, addressing the firm’s core mission, values and infrastructure are crucial to building a durable franchise that will grow beyond the first check.

Mission

Nearly every successful company has a clear mission statements that describes succinctly the reason for “why do I exist”. A venture firm’s mission statement should be clear to all constituents of the firm (firm employees, LP’s, and founders) to ensure focus, discipline, and unity of organizational direction. First Round Capital, YC, and Andreesen Horowitz all have done great jobs about identifying their respective missions. A mission statement shouldn’t be complex, but should be authentic and be able to serve as the directional compass for the firm.

Team Construction

While good team construction doesn’t appear like something that needs to be reinforced, history suggests otherwise given the poor succession planning, lack of diversity, and partnership conflicts that litter the industry. One recurring mistake I see managers make is building a team as byproduct of what they believe will accelerate fundraising. From experience, patchwork or “latch on” partnerships seldom work, and likely will lead to conflict (or worse) at some point — I can’t begin to count how many conversations I’ve had with GP’s who are dealing with unhealthy partnership dynamics. Additionally, once a partnership has been identified, all key issues and potential scenarios must be discussed at the outset, no matter how uncomfortable the conversation. Not having these frank conversations upfront will almost assuredly create really uncomfortable dialogues later.

Core Values

While firms often speak about core values, very few truly build an organizational ethos around them. When speaking about core values with venture managers, we usually find that none have clearly been set, or if they have, little time has been spent truly living them out and making them part of the day-to-day experience of the firm. In this latter case, the stated “core values” are no more than generalized rhetoric. Certain values such as honesty, respect, and trust are table stakes, so it’s important to think about the two to three values you want to see embedded into the firm’s DNA — these values represent the manner to which everyone in the firm must behave, regardless of situation or circumstance with no exceptions.

Infrastructure

While the core function of a VC firm is to work closely work with LP’s and founders, it can’t be done without a strong operational infrastructure. Most of this can be done through outsourced service providers.

Today, managers have a myriad of options given the robustness of the service provider universe for emerging venture funds. As such, managers should focus on securing services from providers that are well referenced, are good personality fits, and can add a meaningful level of value above and beyond whatever core service they offer.

Listed below are the main services you’ll need as a new venture manager.

Fund formation counsel

The first thing you’ll choose as a manager is legal counsel. Choose carefully here as a good formation lawyer can be your co-pilot in navigating through the entire fundraising process. Gunderson Dettmer and Cooley Godward are the two most active fund formation lawyers in emerging VC, however there are myriad of options like Goodwin, Morrison Foerster, Wilson Sonsini, DLA Piper, and Stradling. Costs of fund formation and related expenses can range from $20K-$30K at the low end to well over $100K for more complex situations. Note that depending on the way the LPA is written, much of this cost should be a fund expense.

Fund Administration

Given limited management fee streams, most smaller firms (sub-$100MM AUM) cannot afford bringing on a full time CFO and instead leverage a fund administrator. A fund administrator acts as the finance function for venture managers, providing services such as producing financial statements, tracking/issuing capital calls, working with other service providers, and managing all accounting related activity for the firm. There are many well-regarded fund admins that serve emerging venture firms, including Aduro Advisors, Assure, Cornerstone, MG Stover, Partners Admin, Riedmiller Associates, Standish, SS&C, Strata, and VMS. Fund accounting fees typically range between $30K-50K per year (per fund) and $5K-10K for Management Company accounting. Typically, the bulk of fees incurred for fund accounting are fund expenses, while management fee accounting is a management company expense. Managers should lock in a fund administrator 4–6 weeks before the first close.

Audit/Tax

Any fund that is >$10MM and has true 3rd party LP’s (i.e. not friends and family) will, with some exceptions, require annual audits. For sub-$100MM funds regional firms are the best fits. Firms such as Frank Rimerman, Sensiba San Fillipo, Weaver, and Andersen Tax all provide great audit and tax services for the emerging manager space.

Banking

Hungry to get in on the ground floor of the next great venture franchise, the competitive landscape for emerging venture managers is white-hot amongst banks. In choosing a banking partner, managers should choose a partner that not only can provide relevant products and offer good service, but also can strategically help you in your journey during the fundraising process and afterwards. Banks that are most active in the space include First Republic, SVB, and Square 1 bank. At First Republic (my bank), we’ve focused our energies on developing a platform specifically tailored to help managers be better equipped in running their business by helping with items such as pitch deck development, fundraising strategy, portfolio construction, positioning, LP introductions, setting up of firm infrastructure, community building, etc.

Insurance

Insurance is something some managers don’t always think about, but is an item that always should be considered. A quick conversation with Costello and Sons or Woodruff Sawyer (both of which are focused on venture firms) should be on the checklist before launching.

Starting and scaling a venture firm is exciting. Having durability requires much more than raising and investing. The points above are definitely not meant to be comprehensive (as each could have a separate post), but rather represent key items that venture managers must think about when starting a firm.