Thread by @Samirkaji

Fundraising as a fund manager is tough for 90% of firms of the market. As I've mentioned, we are extremely likely to move into the hardest fundraising cycle I've seen since 2008.

So, what to do in these markets to understand/adapt? 🧵

The reversal in stock markets has created issues:

Inst. investors are being confronted with the denominator effect (size of total asset base has dropped due to public stocks, and VC is now overweight)

HNW/FO are re-assessing portfolios, and feel appreciably poorer/unsettled

This effect is amplified by the fact that 2020-2021 was the marked by EXCESS.

LPs had more re-ups w/bigger amounts (fundraise cycle contracted between funds to 1.6 years and fund sizes ⬆️

Institutions had growing asset bases to deploy, increasing size in VC

FO/Individuals fled to high-alpha potential assets and increased exposure VERY quickly to VC. Everyone felt good with lofty performance numbers (unrealized), and started getting more aggressive/loose.

Having spoken to 400+ LPs this year, people understand that a reset market is beneficial, but yet can't/won't commit as they did before until more visibility on past portfolios and market becomes clear.

So what to do as a manager needed to raise?

First, closely assess your fundraising target. Take a bottoms up portfolio construction approach of what is absolutely necessary to execute thesis and stay competitive. This is not the time to mindlessly increase fund size because "Rounds are bigger".

And know the portfolio math to get to your target return (i.e. 3X net). A good tool to use is @tactycHQ which helps managers do portfolio model and scenario planning. In today's market, if you are a seed manager, dial down follow-on rate a bit from past, and dial-up dilution.

Similar to your portfolio companies, think about product/market fit when raising. I've seen many sub-$100MM Fund 1/2's w/o long track records spend cycles with institutions.

At outset, know *who* you are selling to and why they are a good buyer. Inst? FO? HNW? special interest?

Talk to other managers.

Within the VC universe, there are plenty of managers that are VERY open on their experiences with particularly LPs and can help provide guidance on who is allocating/who is not (you still need to employ judgement as things are often fund dependent)

The top 10-20% of VC managers are more likely to offer you LP introductions in this environment. I know one manager that received 30+ qualified introductions from a top VC manager (who also had invested). Those introductions ended up being 60% of the fund.

Important:

If your fund is <5 years w/o DPI, stop leading with IRR/TVPI. The "my 2020 Fund is 108% IRR" as the lead reason of why you are compelling isn't going to play, and will demonstrate lack of awareness.

Instead be able to clearly identify:
- Where you fit in (@fintechjunkie) chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/assets-global.website-files.com/605db59b78445c…

- What your definable advantages are within your segment. Clear, tangible, and difficult to replicate are where you start.

Don't bury the lead in decks. On decks:

12-15 slides is a great intro deck length
Don't bury the lead. Lps don't need to see 10 slides on sector breakdown before getting to why you are interesting. LPs spend <3 minutes on decks.
Think Twitter, not Substack on deck slide content

Make sure you have a clear answer of where you are going long term. I often ask Fund 1 managers "what do you think Fund 3 looks like" to understand how they are thinking about franchise building.

To this point, many GPs forget that LP calculus (esp. large FO and inst) is computing multi-fund allocation potential. For you, it may be a $5MM-$10MM check, but for them, they are computing $25MM-$50MM & most add only 1-2 new names/year.

When pitching, stop jumping right into the pitch. Do a ton of research before, and ask leading questions to help qualify how to pitch an individual. I still hear LPs tell me that the GP jumped right into pitch mode 2 minutes after a meeting started.

Investing in funds when there are so many choices is heuristic and emotionally driven. The gut/heart makes decisions, the brain justifies it. If you don't know what incentivizes the person personally and professionally, you are falling into the trap of targeting the brain first.

Additionally, it's likely a 15+ year marriage, so get to know people, and stop thinking of them as just $. Be empathetic. While this may be #1 on your priority list, know that this is likely way down on theirs. Reach outs weekly on whether they are in will simply push ppl away

Don't fall into the "happy ears" trap. If someone says they like what you are doing or that "if you just raised a bit more, they would be interested". These are often false positives, and you need to dig further to qualify these statements.

Try not to also fall into a pattern of lazy analysis - Market is down, so it's a great time to buy! Well, it could be, but for early stage managers, downstream financing risk is higher. Make sure you address things like this head on.

Finally, don't be greedy or exotic with terms. In 2021, I saw more Fund 2'/3's going to higher carry (25-30%+). Even if you did a 2/25 in 2019-2021 re-think terms for alignment with LPs; you will do just fine at 2/20 if you execute. Play the long game and be ST focused/LT greedy.