Thread by @ChrisHarveyEsq

Five Reasons Why Raising a VC Fund is So Difficult:
1. Lack of Transparency & Trad Biases
2. Reliance on Two Types of LPs—FOs and HNWs
3. Risk Aversion
4. Strong Competition
5. Covid-19

Original Source: Samir Kaji (First Republic)
Image Credit: SVB (c) 2020

https://twitter.com/ChrisHarveyEsq/status/1331236377946689538

Market Terms for Emerging Venture Funds:

• Management Fees, Performance Fees, Distributions
• Fund Expenses
• GP Commitments
• Hurdle Rates (Preferred Return)
• Key Person Clauses & GP Removal
• Reporting

https://twitter.com/ChrisHarveyEsq/status/1107998912546308097?s=20

Two most important reference points:

• *Different’s 2018 VC Survey (December 2018)
• Carta’s definitive guide to the LPA (September 2020)

https://twitter.com/cartainc/status/1311684302464339968?s=20

https://twitter.com/DifferentFunds/status/1072973267105923073?s=20

1. Management Fees, Performance Fees, Distributions

2 & 20 = "industry standard," BUT for EMS:

• Front-loaded mgmt fees common (2.5%/yr)*
• Fund I's often step down after investment period
• Carry is 20%

“If you do your job well, 20% will make you a bundle.”—Fred Wilson

2. Fund-Level Expenses

$222,000 average cap / $150,000 median cap on fund formation expenses

What expenses are paid by the fund and what expenses are paid by the GPs are often heavily negotiated.

LPs want fees offset and paid for by GPs (see attached)

3. GP Commitments

1-2% GP commit = industry standard

Trending:

• Management fee offsets, taking into account factors other than GP's levels of liquidity

https://twitter.com/lolitataub/status/1321620486799814656?s=20

4. Hurdle Rates (Preferred Return)

• Market in US VC is no hurdle rates (or preferred return)

But ~33% of emerging VC funds reported having one in Different's State of Benchmark Terms from 2018.

And ILPA insists they're standard 👀

https://twitter.com/Samirkaji/status/1211785786955223040?s=20

5. Key Person Clauses & GP Removal

• A key person provision is a standard term in most LPAs;
built on relationship & trust. Can’t contract around dishonesty.

• Most LPAs give LPs authority to sack GP for “cause” (gross negligence). Supermajority vote by 66.6%+ of LP interests

6. Reporting

All depends on your LP base:

• Non-Institutional LPs: Can probably get a pass for Fund I, maybe even Fund II, with no audited financials.

• Institutional LPs: Need audited financial statements. Some pensions will even require these quarterly.

7. Target LP Audience

Most likely target for emerging managers on Fund 1 or Fund 2 is:

• High net worth individuals (HNW)
• Family Offices

2 LP types are >70% of likely targets for Fund I & II.

Download LPA Term Sheet for Emerging VC Fund: 🤓
lawofvc.com/wp-content/upl…

Also see Law of VC #14 - LPA Terms for Emerging Fund Managers—

• Why Raising a Venture Capital Fund is So Difficult
• Market Terms for Emerging Fund Managers
• LPA Term Sheet Template

lawofvc.substack.com/p/14-episode-l…