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How does a venture capital firm raise a fund?

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For many years there has been a great degree of mystery and allure around the whole venture capital industry. I never really understood how a VC firm went about raising a fund, securing LPs; I frankly didn’t understand the whole process. Now that I have first-hand experience in the dark art of raising a fund, I thought I would give a little glimpse under the kimono as to how a VC goes about these things, even during a down and challenging economy.

So how does a venture capital firm raise a fund?

It starts with an idea and vision. For me, it was about nothing more than trying to make the current VC model incrementally better. I saw a need, and came up with a solution. It’s essential to surround yourself with the very best people possible who can help carry out and execute upon your strategy and the concept that is laid out. This involves very expensive attorneys, specialist consultants, very connected individuals, partners, accountants, team members, communication and marketing firms, placements agents, collaborating with other private equity and venture firms and A LOT of networking in existing networks while simultaneously building new relationships. This is why venture capital is not for everyone. Guy Kawasaki has a great quote that I really like: "Venture capital is something to do at the end of your career, not the beginning. It should be your last job, not your first."

When a VC wants to raise a fund, they know that it will take twice as long as predicted, cost twice as much and there is still always the potential that the fund will not close especially during times like now. There is just no room for average people doing average things in the financial and entrepreneurial markets. You must have something that is still traditional enough that people can understand, yet is a little bit different while having a better value proposition.

Most people forget that investors need investments just as badly as investments need investors. However, after the recent global financial crisis, a lot of the old rules went straight out the window.

For Huckleberry, what is important is that we not only have the best team internally, but also externally with our strategic partners, advisors, limited partners (investors), and anyone or any company that has involvement with the firm.

Raising a venture fund is not for the faint at heart. It is VERY expensive, VERY time-consuming, and VERY demanding. 

We hired Matthew Craig-Greene, a London-based specialist VC, private equity consultant and managing principal at IE Consulting. He told me: "Fundraising VCs need to have a clear idea of what LPs are looking for; it obviously pays to understand potential investors’ needs, as well as what they fear, before drawing up the fund’s documentation."

Craig-Greene went on to say:

"When a VC is trying to raise institutional money to fund its next wave of investments, it has to convince pension funds, insurance companies and other potential investors of three things:

1. That it has identified a (preferably unique) opportunity: this is the investment idea.

2. That is has developed the best strategy for extracting value from that opportunity.

3. That its team is the best place to execute that strategy.

That may seem simple, but it is anything but!"

Constant networking, assembling pitches, legal documentation, marketing collateral, events and conferences, meetings, meeting, and more meetings, and a VERY crazy schedule are just a few of the tasks necessary to raise a fund.

So if you are going to raise a fund, I leave you with this. Don’t plan on raising a fund, unless you plan on doing what it takes to raise a fund. 

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