Thread by @Samirkaji

Have been asked by a lot of fund managers about whether institutional LPs will invest in Fund 1’s in today’s environment, and if not, what needs to be demonstrated to attract institutional LP capital in future funds
Thread

1/Institutional LPs will invest in Fund I, but with major caveat. Fund manager must have 1) great institutional track record from prior experience 2) Rockstar operator (likely with a $B exit) & must have something uniquely really compelling/different about model

2) Important to remember that inst. are generally misaligned for most Fund I offerings (takes as much time or more to diligence a $50MM fund where $10MM can be deployed) versus a $500MM fund where $50MM can be deployed. Risk/return is also asymmetric.

3) Fund of Funds/Strategics can be exception but also very limited today given existing portfolios and mandates

3) So If not fund 1, what about fund 2? With fund cycles at 18-30 months for sub-$100MM funds (vast majority of new vc entrants), there really isn’t enough evidence to suggest inst. quality is present. Mark-ups are likely but heavily discounted

4) more important things than mark-ups are: Execution of sourcing/winning in thesis area, evidence of strong infrastructure, evidence of astute portfolio construction/management, and enough portfolio evidence that helps delineate skill vs luck of manager

5) Most inst. LPs want to scale check sizes (writing $5MM for a large endowment doesn’t move the needle; Lowercase 1 rare exception of a fund that would), and therefore need to be convinced your model can work at scale.

6) to the prior point on scale, Writing a $150K check into great companies doesn’t mean your thesis will allow for $500K-$1MM checks. Check size in constricted rounds is directly correlated to the value you need to evidence to win best opps

6) Most likely for any Fund I manager that is $20/25MM, most inst interest won’t come until Fund 3 when proof points are more meaningful. Building relationships post Fund I close are very helpful as it gives you 2-3 year window for long term targets to familiarize with you

There are exceptions, but proof of concept LPs are rarely large inst in today's market