So You Want to Raise a Fund? 6 Lessons in Fund Formation

Today marks the end of the beginning of Akkadian Ventures, as we announced our third fund and our first institutionally backed one.   Many people don’t know, however, that Akkadian is the second “first time” fund I have started from scratch.  (In 2007, Josh Becker and I raised New Cycle Capital, which was an early stage fund focused on Impact Investing, and which generated good returns for our vintage year despite running headlong into the 2008 financial crisis.)

In a town obsessed with entrepreneurs, we forget that starting a fund is as entrepreneurial as starting a company.   The universe of people who have started two completely different private equity firms from scratch in the last 8 years is small.  So, for all those aspiring fund managers who do not have a billionaire in their pocket – those who have to do it the hard way — here are some lessons I have learned.

Lesson 1:  Have a maniacal focus on doing one thing better than anyone else

A smart fund investor once said to me that “most venture capital funds are no more than a few smart guys running around having coffee and talking about all the important people they know.”  Do not be one of those guys.  With hundreds of new funds formed in the past few years, a fund manager needs to be more than the sum of their network.  They need a clear strategy and to own a place in the ecosystem.

A clear and unique focus helps fundraising and business building.  Many of the best new funds stand out to investors because they go so deep into one sector or strategy that any entrepreneur in their space simply has to work with them.   Some of my favorite examples of new firms include:

Forerunner Ventures – Next Generation Commerce

CrossCut Ventures – Southern California Seed Stage

Structure Capital – Businesses that utilize excess capacity

Amplify Partners  – Amazing depth in core IT Infrastructure

At Akkadian, we are completely focused on using proprietary data to generate unique and differentiated secondary investments.  That is all we do.

Lesson 2:  It’s the quality, not the size, of your track record that matters

In 2011, Akkadian did a series of very small transactions ranging $150K to $1.1M in seven companies for a total of about $5M. I raised the money on a “deal by deal basis”, which was challenging and humbling.  However, while most of the industry was chasing auctions of secondaries in a few brand-name companies, we developed proprietary techniques that enabled us to find great companies under the radar.  Two of those companies have already gone public (Splunk & Opower).  We returned the 2011 fund in less than 2 years and the 2012 fund is well on its way.   Now with seven exits out of twenty positions since inception, our track record is solid.

When fundraising, nobody cared that our initial investments were small.   They cared about how we sourced them and the thought process that drove the investment decision.

Lesson 3:  Get out of Silicon Valley

Most investors in the Bay Area are significantly overweight in venture capital.  However, it turns out that the rest of the world is pretty interested in venture capital but has much less exposure.   In 2011 and 2012, we found a majority of our early money pitching individual investors — not institutions — outside the Bay Area.    Some markets were more fruitful than others.

For those of you pitching individuals outside of the Valley, I have some general light-hearted suggestions on what to expect.

Los Angeles:  Fund investors in LA seem more concerned than investors in other cities about who else is in the deal.  It’s important to understand the social dynamics you are walking into.  A particular investor in your fund can either bring a whole bunch of other investors or turn off other investors.  Understand your LA investor before you meet.

New York:  New York investors do not care who you are.  And do not bother telling them about how you are changing the world.  They just want to know how you are going to make them money, and the more unfair your competitive advantage, the better.

Texas:  Texas is an underestimated market for venture.   Texas investors are the most fun people to pitch in the country, in my opinion.  They love a calculated risk.  After all, drilling for oil is not that far off from doing a startup.  You either hit it or you don’t. They care about working with people they like.  If a good friend introduces you in the right way, you will make friends (and investors) for life in Texas.

Boston:  In Boston, experience and background really count.  I had more questions about my background than anywhere else. Who did I work for in the past?   Why would I go out on my own when I could work for such a great established firm?  Where did I go to school?  What did I study?  I did not usually get these questions elsewhere.

Go outside of the Bay Area, but adjust your pitch and networking approach to each location.

Lesson 4:  Find the right investment partners

Raising my first $5M for a theoretical strategy was difficult and humbling.   Raising the next $30M got easier once we had some results, but it still an uphill climb.  But once I brought on Mike Gridley, who has been in the secondary industry much longer than I had, my life became immensely easier and more fun.

Business is a team sport.  Build a team you love, even if it means less profit and control for yourself.   Now that Pete, Mike and I have added Rob Bailey too — one of the highest energy and well-connected executives around — we have massive firepower for a small focused fund.

Lesson 5:  Ask this one question before your pitch  

Remember that each investor will analyze a venture strategy through their own lens and investment philosophy.   To find out how an investor thinks, I would ask each potential investor before my presentation to tell me about their favorite recent investment. That one question told me whether that investor was more interested in risk mitigation or profit maximization. I could then tailor my pitch accordingly on the fly.

Lesson 6:  Stay small, even when you can finally go large

The returns on our first two funds are looking good.  We could have raised a lot more money than we did.  We view an oversubscribed fund as a high-class problem.  Few people realize, however, that fund size and fund returns are often inversely correlated.   Despite this fact, every year, many talented investors continue to raise huge funds early in their development.

With a small fund comes discipline.  I believe that a small core fund, with the ability to invest larger through co-investments, will result in better returns and a stronger alignment of interests.   I would not want to manage a $200M+ fund in this space unless I had at least a decade to build up that kind of capacity.  The bigger the transaction, the more competitive and efficient the market.  I like our fund size just the way it is.

In conclusion, raising a first time fund is certainly challenging but its doable.  Be scrappy.  Be creative.  Have a crystal clear fund strategy.  Do not worry about what other people are doing.  Execute.

About Ben Black

Benjamin Black is the Co-founder and Managing Director of Akkadian Ventures, LLC. An eleven-year veteran of the private equity space, Ben co-founded Akkadian with Peter Smith, to specialize in offering early liquidity to entrepreneurs, early employees, and investors in successful private companies.

One Response to “So You Want to Raise a Fund? 6 Lessons in Fund Formation”

  1. I love reading what you write. What an educational piece even a mother can understand!

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