How to Raise Your Own Venture Capital Fund

So you think you’re ready to raise a venture capital fund. But are you really? 

Getting into venture capital isn’t a matter of hanging a shingle and declaring I am a venture capitalist. 

How much experience do you have with investing? Have you invested any of your own money? How big is your network? 

Winter Mead poses those sorts of questions to beginner fund managers through Coolwater Capital, an accelerator for emerging VCs. First and foremost, he wants emerging fund managers to know what they’re getting into. 

“The core part of being a fund manager is to manage money to invest,” he says. “It's not whether or not you should raise or whether or not you should pursue this dream. It's more like, figure out if you like the sport before you play it.” 

On an episode of the How I Raised It podcast, Winter raises thought-provoking questions to ask yourself and defines some of the different sectors of the industry. 

In this two-part series, I’ll break down Winter’s best advice on breaking into venture capital — even if you have no prior experience. 

Before you begin

The prep work for becoming a VC starts years before you call yourself one. It might sound counterintuitive, but you need to make an investment before you invest. Winter explains more on this. 

“I've had people come to me saying they want to be a fund manager. And they've never made an investment themselves. That's a hard, logical leap in my mind,” he says. “I've made at this point over 175 investments over the last 14 years. I love investing, and I know how hard it is. If you haven't made an investment, why do you want to be a fund manager?” 

To get your feet wet, Winter recommends starting with some small investments, even as low as $100 to $1,000. Another option is to manage a phantom portfolio as a way to practice. 

It’s also important to consider how you can use your skills to help founders. Winter makes a distinction between what’s fundable and what’s helpful to founders. If you’re coming out of a top 20 VC firm, you will likely get funded. Your track record at that firm will determine whether you get a large or small investment, but having that deep resume will be a big help regardless.

But what if you don’t come from a top VC firm? Maybe you’re good at getting companies from zero to one, and you excel in the early growth stages of a business. While that might not make you highly fundable, it does make you helpful to founders. That can also build a strong story to convince funders to choose you. 

The who’s who of investing

Winter identifies three different groups who tend to enter VC. 

Angel investors

These are individuals who have put their own money into companies, usually with check sizes between $10,000 and $100,000. With Coolwater, Winter finds that most emerging VCs have done perhaps 12 angel investments. That’s not a small number, but the more successful entry-level VCs will have closer to 30 angel investments. 

“You've definitely demonstrated to the market, to people that would invest in you, to limited partners, that you're serious about investing,” he says. “If you've done 30-plus investments as an angel, there's definitely some sign of love for investing.”

Operators

Operators are usually founders of companies or C-suite level in the startup space. They’re experts in strategizing for a company’s building stages, with a particular talent for identifying rising founders who might be worth an investment.

While the angel bucket builds your skillset of spending your own money, the operator has access to rising founders and insider perspective on market trends. 

Spinout from a VC firm

Finally, some investors “graduate” from VC firms where they served as an apprentice. Since they studied under skilled pros they have the skills and knowledge to identify smart investments. 

The required materials

You’ve got a few investments under your belt, and you know which level of experience you bring to the table. The starting materials might be more simple than you think. 

An email account dedicated to investing sets a professional tone. You’ll also need to select a CRM to keep your leads organized (I suggest FundingStack). Having a business credit and bank account ready to go will also make things flow smoothly. 

But then it comes down to the most basic of marketing materials: your pitch deck. And again here, nothing overly fancy is needed. Have your fund’s thesis and your go-to-market strategy clearly defined and you’re already well on your way to landing your first investors.

Finally, choose a way to distribute reporting on how the fund’s performing, which can be as plain as an email newsletter. 

What venture capital isn’t

There are some common misconceptions that make venture capital look more glamorous than it is. Winter says that many people think they won’t have a boss anymore, and in a small way, you don’t. 

However, every person who invests with you then becomes your boss. They all have certain expectations of how their money will perform, and they want to see you tracking it. 

Because it’s not simply a matter of collecting and distributing checks. Winter mentions that there’s a good deal of reporting involved, whether on a monthly or quarterly basis to keep investors informed. 

Fund managers should also expect their first fund to take a while to raise. 

“This is going to be market dependent but between six — in the best of markets — to 24 months, which is usually the end of when you can actually raise if you're really pushing the limits,” Winter explains. “Most people are giving themselves two years to do the first raise.”

Just like most things, being a VC is no get-rich-quick scheme. 

Parting words

Want to dive deeper? If you can’t make it into Coolwater Capital, the next best thing is to read Winter’s book, How to Raise a Venture Capital Fund: The Essential Guide on Fundraising and Understanding Limited Partners. There, he goes more in depth into the building blocks of a career in venture capital.