Starting a fund is starting a business. It’s a two-sided business model with one side involving aggregating capital from investors and the other side being the allocation of that capital to compelling opportunities. I have advised organizations on starting funds and I myself started Pique Fund and managed it through my business, Pique Ventures. It may very well not be the last fund I ever start.
To start a fund, you need to answer the many questions involved in starting a business like What is your value proposition? Who are your customers? How big is the market opportunity? Why will they buy from you? Who is your competition? What advantage do you have? What is your revenue and cost model? What impact do you want to see in the world and how will you measure that?
Having advised on funds and spoken with many other fund managers, I discovered that in addition to the basics of business building, there are a number of critical factors for starting a fund. Before I get into that, some thoughts on the business model and who exactly your customers are when you start a fund.
When I first contemplated starting a fund, I wondered whether investors or entrepreneurs were my customers were. I wondered if both segments could be and if I could serve them both well. I settled on this, essentially approaching starting a fund as a two-sided business model and treating both investors and entrepreneurs as my customers.
Some folks might treat investors as their customers and put generating returns as the top priority. Most treat entrepreneurs as their customers and prioritize how they can help and add value to their portfolio companies.
How to start a fund
Upon reflecting on my foray in starting and managing a fund, and having interviewed a number of fund managers to find out what the key factors were for their success in raising their first funds, I found that there were six key things. I’m developing these ideas further in my second book, Share Equity, but here is the high level summary of what you need to start a fund.
- Privilege or advantage. Privilege came up numerous times in my interviews, however upon digging deeper, I realized what many managers were describing was advantage – earned or otherwise. The funds and fund management space is very competitive. To start, you really need some kind of advantage.
- Purpose. Everything starts with why. If you don’t have a meaningful purpose and vision for your fund, it becomes very difficult to start and persist, particularly as you hit roadblocks or challenges in fundraising, investing, or managing the fund.
- Proof. Fund investors care deeply about your track record of investing. Even if you have a track record of some sort, without an advantage (see #1 above), you must keep proving yourself. You must prove that you’re able to source deal flow, that entrepreneurs will want you on their cap table, that investors can trust you with their money, that you’ll generate the returns and impact that you say you’ll generate.
- People. There is an increasing prevalence of solo fund managers, however, there is strength in numbers. Finding the right partners to start a fund will help you make decisions better (assuming you can make decisions together well), help you persist through challenging times, and you can leverage each other’s strengths and networks. You need people to invest in. Being part of a supportive community or venture ecosystem can help you identify opportunities. Investing through a fund is ultimately a people business.
- Powerful partners. Just as startups benefit from having a lead investor in their rounds, having an anchor investor can be helpful in starting a fund. Having mentors and a strong network of powerful and influential people who can connect you to potential investors is a difference-maker.
- Principal. Starting a fund is capital intensive. You need enough principal or capital to invest in your own fund. You need enough money to support yourself while you’re fundraising and in the early years of managing your fund when you may be generating little to no income.
There are considerable legal, regulatory and financial concepts to understand in order to start a fund, such as the structure of a fund and management company, key terms and conditions, from whom you can raise money, and how to account for and manage capital calls and investments. Getting good legal counsel to support you in fund formation is helpful, but starting a fund really starts well before taking those steps.
I’m taking a break from raising and managing venture funds, but I’m sharing what I learned from raising Pique Fund and attempting to raise a second fund. I’m also sharing the stories I heard from other fund managers that successfully launched their first funds to help other aspiring investors understand what it takes to start a fund. Follow along here on the blog or let me know if you’re interested in Share Equity, the book.