Often, these outsize funds represent the industry as a whole to the broader public News outlets that focus on venture capital often report on high-profile fund closings by well-known firms that raise billions of dollars.
These large funds often represent the industry as a whole to the general public. VCs who are just starting out try to get people interested in their funds by posting about successful events on social media.
When a fund closes, new investors are no longer able to buy into that fund. Existing investors are still able to hold or sell their shares, and the fund itself can still be bought or sold on the secondary market. What is the difference between holding a first close and a second close?
What Is A VC Fund Closing
An investor signing the fund’s subscription documents signifies the closing of the fund. The fund’s general partner must countersign the documents in order for the closing to be official.
The investor makes a formal capital commitment to the fund and becomes a limited partner. GPs usually close an investment round with several investors at a predetermined date.
A venture capital fund can have one or more “closings” in which it collects payments from investors before it stops accepting new investment commitments. After a fund’s final close, the general partners (GPs) do not accept new limited partners (LPs) to the fund.
It’s not common for funds to open back up again once they close, is what this is saying. At this point, GPs (general partners) start focusing more on finding good investments and less on raising money, supporting the businesses they’ve invested in, etc.
Why Funds Hold Closing Events
As a GP, you have the opportunity to invest in capital that is closing. After a limited partnership has invested in a fund, the investment agreement gives the limited partner the right to request more money from the other partners, up to the amount that was originally agreed upon.
An LP can request to have their entire contribution to a fund returned to them when they close their investment. You should only invest a large amount of money if you have deals lined up.
Too much capital can negatively impact a fund’s internal rate of return. Most GPs call for a certain amount of capital at closing and then call for more as needed.
Minimum Fund Size
VC funds are typically closed-end, meaning they have a set time frame, usually 10 years, and a set amount of capital. Most of the fund’s money is invested after the final close.
Your ability to successfully execute your investment strategy is largely dependent upon the total amount of money you have to invest.
The investment strategy you establish should taking into account the industries you want to invest in as well as the stages of the companies you’re interested in. Another thing to consider is how many investments you’re willing to make and how much money you’re willing to set aside for follow-on investments.
The minimum amount of money you will need to successfully carry out this plan is referred to as your “minimum fund size.”
Stages In The Closings Process
After holding meetings with potential investors to present the fund’s investment strategy, the entrepreneur will set a date for the first close in order to officially launch the fund and begin the fundraising process.
This is the deadline for your LPs to subscribe to the fund. LPs are encouraged to subscribe to funds as early as possible by making it more attractive with terms in the LPA. LPs who subscribe after that time are charged a fee.
Although it is not very common, some funds are able to reach their target fund size at their first close. GPs typically strive to close on at least 25% of the minimum fund size during the first close.
This indicates to potential investors that the fund is close to meeting its goal. This text serves as a reminder that people will soon need to make a decision about whether or not they want to subscribe to the fund, and to watch for an announcement about the final closing date.
The length of a fund’s fundraising period is specified in its LPA. Once this period has elapsed, the fund must close. It generally takes 12 months from the initial closing, with the option to extend that timeframe by six or 12 months if a certain number of your investment partners approve.
If you are hoping to raise a large sum of money, you may want to consider holding more than one event after the initial close, but before the final close.
If you’re a new manager trying to get funding, it’s important to show potential investors that you’re making progress towards your goals. This will help convince them to invest in you.
The strong momentum of the fund indicates that it is gaining popularity among other investors, which indicates that the fund is likely to achieve its target size and that the investment thesis is overall viable.
You’ll need to weigh the potential benefits against the amount of work involved. For each new group of investors that joins the fund, you’ll have to recalculate everyone’s ownership percentages as if they had all invested at the very beginning.
Some of the capital that was previously invested in the fund may need to be redistributed to the investors that are still participating in the fund.
The best-case scenario for fundraising is to reach your desired funding goal before your fundraising timeframe expires. By doing this, you are ensuring investors that you have the money necessary to successfully carry out the investment strategy they are investing in.
If you have to close your fund at a smaller size than you had planned, you will have to change your investment strategy. If you start with too little capital, you won’t be able to invest in as many companies as you want or you’ll only be able to invest smaller amounts.
Since investors base their decisions about whether to invest on your fund’s investment strategy, revising it could lead to investors pulling out (although this is rare).
If a fund is “oversubscribed,” that means that it has more demand from potential investors than the fund can accommodate. This can happen when the fund’s managers feel that they would not be able to invest all of the money that potential investors are offering.
If the stock market closes at a high, you might need to change your investment strategy. If you have more funding than you need, it could make investors question your ability to carry out your strategy on a larger scale. Some record labels could choose to stop working with the company as a result.
Winning Mindset Before Going Into Your Meetings
1. Keeping Your Head In The Game
You will only receive funding if you maintain an optimistic outlook, even when you feel hopeless. You must remain calm and optimistic. You should only have a maximum of two to three meetings in a day.
If you’re stuck in traffic or have a meeting that goes poorly, it can impact your performance in future interactions. If you try to pack five meetings into one day, you won’t have time to change your mindset.
It can also be tiring to be alert and engaged during meeting after meeting. You are using your intellect and emotions to access your personal knowledge. Your brain can become overwhelmed.
If you continue to have meetings after your third one, you may become overwhelmed. If you are not a morning person, do not schedule morning meetings. You only have one opportunity to make a good first impression, so it’s better to reschedule than to put yourself in a situation where you can’t do your best.
2. Who Should Pitch
The CEO should know every aspect of the business well so that they can have a thorough and meaningful conversation with the VC, or the VC will doubt the CEO’s leadership abilities.
Having only two other founders in your meetings is not the best option. It may make sense to have your technical co-founder present if they are a strong communicator and can contribute to the story.
If this is not possible, it is better for the CEO to lead the meetings.
It’s crucial to have a team and structure in place to ensure that the company can run smoothly in your absence. The CEO is focused on fundraising and only brings in other team members or co-founders when requested or necessary.
3. Moral Support
It’s important to have someone to provide moral support as you work hard.
Fundraising is like being on a lonely island. It’s important to find people you can confide in and who will offer helpful advice when needed. These people can be a family member, co-founder, advisor, or seed stage investor.
4. Getting Feedback
Even if you’ve done everything right, you can still have a terrible meeting. If you don’t practice your pitch, nailed the punchy one-liners and build a strong ancillary story around your deck, the VC probably won’t be interested.
This means that there is not much you can do to change the situation. Cut the loss, stay positive and move on. Although you have the right to request feedback, the VC is not required to provide it.
VCs that typically invest in Series A companies usually invest in three or fewer companies per year. There are a million different variables that you can’t always plan for that gets them over the finish line. Remain respectful and keep the door open.
A VC may decide to invest in a company even after they initially turned it down. What is most important about meetings where the outcome is unclear is to not let it affect your mindset.
5. Filling In The Gaps
After your first meeting, you should try to find out if there are any information gaps or pet theories that the VC may have about your business that could make them feel uneasy.
You shouldn’t try to placate someone by saying things that you think will make them feel better without truly understanding the source of their fear. Acknowledge and try to understand what is causing them to feel this way.
To probe gently means to ask questions in a way that does not seem offensive or intrusive. Asking if anything about the company and vision seems scary shows that you are interested in their concerns and are willing to help address them.
Be honest about the difficulties you faced in the beginning, but show that you have overcome them. Let your confidence shine through.
Take note of the important messages they’re communicating. Take a deep breath and don’t get emotional. VCs are trying to reduce risk by having access to accurate information.
6. Following Up
After you have your first few meetings, you will probably have a few more meetings with the same people. However, communication might stop after that.
At this point in the process, you will have met with a second partner and given them access to the data room. They may have requested a specific dataset, which you provided, and then they suddenly stopped communicating with you.
Entrepreneurs should not get nervous and start emailing a VC right away, but should give them the appropriate amount of space instead. If you don’t hear back from someone after a couple of meetings, it’s probably okay to reach out to them again.
Don’t try to rush them, they have other things they need to do. VCs are in the business of running complex businesses, so they should be given the space to do so. If you haven’t heard back from the person after more than a week, it’s okay to reach out to them again. They may just be doing homework. Don’t assume they’re not interested.
7. Setting Up Your Data Room
If you’re meeting with potential investors, it’s a good idea to have your data and documentation organized in advance. This way, you won’t appear rushed or disorganized. Typically, the data room will include your:
- cap table
- legal agreements
- financial model
- PNL cash flow statements and balance sheets
- product roadmap
- org chart
- technical documents
- all of your IP, where the origins are and what you built vs. what you what you’re using off the shelf
- customer references
- background check (though they will likely ask to run their own)
8. Be Conscious Of What You Share
What you share is up to you. In order to discern genuine interest from sneaky behavior, you need to be able to judge the situation. An unscrupulous VC may be speaking to a competing company, evaluating both business plans, both financials, both cap tables.
You have to be able to read intent.
If someone is interested in understanding a company’s financial model, cohort data, transactional information, etc., but is not interested in the company’s future plans, they may only be interested in using this information to gain a competitive advantage, rather than out of genuine interest.
This does not happen often because the reputations of venture capitalists are very important. But it happens. Be aware. Use your best judgment and instincts to tell the difference between someone who is genuinely interested in you and someone who is just trying to get ahead by getting information from you.
9. The Partnership Pitch
Pitching your partnership idea to a room full of people can be daunting. There could be anywhere from 10 to 15 people in the room, possibly more. At this point, you’re going to speak to a much larger audience, some of whom who may not be interested.
If all goes well, you will be better prepared for meetings after having gone through many of them and will have a more refined story. You should also be more confident, understand what questions will be asked, and know what information people are most interested in hearing.
During the meeting, people who don’t understand the topic being discussed will ask questions. The more questions they ask about the business, the more doubt they will have when you leave the room.
The more “why” questions that are asked about the opportunity, the vision, and the future, the more it can be assumed that the people understand the basics of the business.
They want to know if this is a good enough opportunity and if the company has what it takes to be successful on a large scale.