5. Launch a VC Fund

Launch A VC FundVCFI

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Starting Your VC Fund:

Launching a venture capital fund is like building a new business from the ground up. It involves several key steps, from figuring out your investment game plan to handling the paperwork and getting ready to manage everything. Here's a breakdown of how a VC fund gets started.

Let's explore the essential steps in VC fund formation:

5.1

The Fund Thesis: Defining Fund Strategy

First things first: what kind of companies do you want to invest in?

This is your fund's strategy.

It's about clearly defining your investment thesis – your core belief about where you can find and create value.

Think of your thesis as a short, powerful statement that quickly tells people what your fund is all about.
It should clearly communicate your plan and why you're set up for success in a specific area.

What's your focus? Will you specialize?

By Industry: Like only healthcare tech, clean energy, or financial services (FinTech).
By Stage: Focusing on brand-new companies (Seed stage), those starting to grow (Series A/B), or more mature ones needing a push (Growth stage).
By Geography: Investing only in startups in a specific city, region, or country.
By Theme: Like investing in companies with a social mission or those using a specific technology (e.g., AI).

Other Considerations:

How much will you invest? Define your typical "check size" per company. This is the amount of money you expect to put into each startup.
How many companies? Plan the number of companies you expect to have in your portfolio. This affects your strategy for managing them.
How big is the fund? Set a target for the total amount of money you want to raise. A smaller fund might focus on Seed stage with smaller checks, while a larger fund can write bigger checks for later-stage companies.

Your Secret Advantage - What Make You Better? Why You?

This is what makes you different from other fund managers and convinces investors that you have a special ability to find and support winning companies in your chosen area.
It should be something specific to you or your team and, ideally, backed by proof.
Examples of proof that show your unique edge and resonate with investors include your track record of:
- Helping companies get successfully acquired or go public (investment exits).
- Past investment returns.
- Previous capital you've raised or deals you've closed.
- The number of companies you've successfully helped.
- The strength and relevance of your network in your focus area.
- Your years of relevant experience (like being a founder or operator in that sector).

Defining a clear strategy and what makes you better is crucial because it tells potential investors (LPs) exactly what your fund is about and helps you make consistent investment decisions later.

Here are some of the best resources to guide you in developing your thesis:

https://govclab.com/2025/04/14/vc-fund-thesis/

https://www.goingvc.com/post/how-to-develop-your-own-investment-thesis-a-critical-step-for-aspiring-venture-capitalists

https://carta.com/learn/private-funds/management/portfolio-management/investment-thesis/

VC Lab Thesis Assistant:

https://chatgpt.com/g/g-yHkAFBqNM-vc-lab-thesis-assistant

5.2

Initial Fundraising Outreach

With your strategy and thesis clearly defined, the next step is to start talking to potential investors – your Limited Partners (LPs). This initial outreach phase is about gauging interest and getting early feedback before diving into significant legal expenses.

Identifying Potential LPs: Research and find individuals or organizations that might be interested in your specific fund strategy (e.g., family offices, experienced angel investors, smaller institutions).
Creating And Refining Initial Materials: Prepare a concise pitch deck and a summary of key terms (a "lights out" term sheet or executive summary) to introduce your fund concept. These materials should be compelling but don't need to be the final, legally-vetted versions yet. You will need to continually update them based on feedback.
Testing the Waters: Share your materials and pitch your vision to potential LPs. The goal is to see if there is genuine interest and gather feedback to refine your offering.
Building Early Relationships: Start building rapport with prospective investors. Their early interest and potential soft commitments are crucial signals.

5.3

Legal Setup Triggered by LP Interest

This is a critical juncture.

It's often wise to wait until you have significant positive feedback or potential soft commitments from LPs before incurring substantial legal costs. Drafting the full fund documents and setting up complex legal entities is expensive.

Many experts in VC Fund formation suggest you don't spend a lot of money on detailed legal documents and entity formation until you have strong indications of commitment from potential LPs. Early legal costs for initial advice are manageable, but the full documentation process is a significant investment that should be de-risked by confirmed investor interest.

Once you have confidence in attracting sufficient capital, you hire experienced fund formation lawyers. They will guide you through the necessary legal steps and ensure compliance.

With legal counsel engaged and the structure decided, the next major step is the creation of the fund's core legal documents as determined necessary by your lawyer. These may include:

The Limited Partnership Agreement (LPA): This is the most important legal document for the fund. Lawyers will draft this detailed agreement based on your strategy and negotiated terms with key LPs. It governs the entire relationship between the GP and the LPs.
Private Placement Memorandum (PPM): This document provides detailed information about the fund, its strategy, risks, management team, and the terms of the offering. It's a key marketing and disclosure document for LPs.
Subscription Agreement: This is the document LPs sign to officially commit capital to the fund.
Management Company (ManCo) Agreement: This agreement governs the operation of the Management Company entity.
General Partner (GP) Agreement: This document governs the operation of the General Partner entity. It details the ownership among the individuals who are the principals of the VC firm and how decisions are made related to the GP's role in managing the fund.
Regulatory Filings: Your lawyers will handle the necessary filings with regulatory bodies (like the SEC) to comply with securities laws.

5.4

Fund Closings (Initial and Final)

Think of a fund "closing" as making the investment commitments official. This is when LPs legally subscribe to the fund.

Initial Closing: This is the first official closing where the fund accepts initial capital commitments and can begin its investment activities. It's a major milestone.
Subsequent Closings: Many funds have additional closings over a period (often 12-18 months) to bring in more LPs and reach their target fund size.
Final Closing: This is the last opportunity for investors to join the fund. After the final closing, the total committed capital for that fund is set.
Capital Calls: At each closing, and periodically thereafter, the GP will "call" for a portion of the LPs' committed capital as needed to make investments or cover fund expenses.

5.5

Managing Fund Operations with Administration Solutions

Once your fund has secured capital commitments and starts making investments, there's a lot of ongoing work to manage everything smoothly. These are the "operations" of the fund, and they can get pretty complex:

Tracking Investor Money: Keeping precise records of how much each investor (LP) has promised (their commitment), when you ask for that money (capital calls), and when you send profits back to them (distributions).
Managing Investment Data: Maintaining detailed records for every investment you make – how much, when, the terms, and ongoing information about the portfolio company's performance.
Reporting to Investors: Regularly providing LPs with updates on the fund's performance, individual investments, and financial statements. This needs to be accurate and timely.
Handling Fund Accounting: Keeping the fund's books in order, tracking income, expenses, and asset values according to specific accounting standards.
Ensuring Compliance: Making sure all fund activities follow legal and regulatory requirements, which involves careful record-keeping and filings.

These administrative tasks are crucial but can be time-consuming and require specialized knowledge. This is where fund administration solutions come in

These are specialized technology platforms (like Carta) or external service providers (like Phoenix Fund Services https://www.phx-fs.com/ ) designed to handle these complex "back office" functions.
They help automate and streamline tasks like accounting, calculating performance metrics, managing capital calls and distributions, and generating LP reports.

By using a fund administration solution, the fund management team is freed up from heavy administrative work, allowing them to focus on finding and supporting great companies. Choosing the right solution and setting it up correctly is a critical step for building an efficient and compliant fund operation that can scale as the fund grows.

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