Sam HuleattI spent much of 2023 helping new venture fund managers raise their first funds. A consistent challenge I’ve observed during fundraising for a first fund is the move from 1st degree limited partners (LPs), to 2nd and 3rd degree LP connections.
For a first fund, typically 50%-100% of the capital raised will come from 1st degree contacts. This is understandable, as those who already know you best are those most willing to take early commitment risk. 1st degree contacts are most willing to invest in potential (i.e. betting on the person), even someone with an unproven thesis, or limited track record. Kevin Kelly has written about finding 1,000 true fans. For new managers, start your raise by finding your 10, or 20 true fans.
While 1st degree contacts will comprise a big chunk of your first fund, it’s unlikely you’ll be able to fill the entire fund without branching out. Even the most well connected GPs will need to find some out-of-network LPs to get to a final close, or oversubscribe. Moving from 1st degree LPs to 2nd and 3rd degree is a big challenge and common stumbling block for almost all first funds. What works to close 1st degree LPs, is not necessarily what works for 2nd and 3rd degree LPs. The further out of network you go, the more you will need to invest into trust building (in-person meetings, hand holding, diligence, etc), proof points (references, track record, etc), and creating urgency. Out-of-network LPs take much more time to close and have a lower conversion rate.
What follows are some insights and strategies I’ve seen result in successful fundraises after having worked with more than 40+ new venture funds.
Attributes of Successful Fundraises:
If I had to boil down the most important attributes leading to a successful GP fundraises (for first time fund managers) they would probably be:
- Network
- Track record (institutional > angel)
- Ability to sell
- Thesis
- Everything else (deck, data room, etc)
Why Network Is Attribute #1
In my opinion, your network is the most important attribute in fundraising. To me network is #1 because the majority of first funds are raised from people you know. If you don’t have the ‘right’ network, or a sizable enough ‘right’ network, you should probably consider delaying a fundraise to focus on network building. A robust network not only aids in securing funds but also signals trustworthiness, competence, and achievement.
Especially before you’ve closed at least half the fund, attracting institutional investors like fund-of-funds or family offices is rare — the exception being for spin-out managers. That said, even the most well connected GPs, are likely to exhaust 1st degree connections before they’re able to fully close out the fund. As a result, most GPs will need to engage out of network LPs (i..e, 2nd or 3rd degree) - and likely some institutional capital - to close/oversubscribe the fund. However, your network is still the most important attribute here because you will rely on 1st degree connections to provide warm intros to these out-of-network LPs.
Again, plan to spend 95% of your time on 1st degree LPs until you have closed at least half the fund. Even if institutional investors appear receptive earlier, it’s a bit of a catch 22, and they are unlikely to become hard commits and wire funds until you’ve closed half the fund.
LP Personas & Targeting
So how many LPs do you need in your initial pipeline? While it varies, ~200+ LP prospects (the majority being 1st and 2nd degree HNWI personas) is a good starting point.
Keep in mind, not all LPs are equal. To reiterate, spend the majority of your time early on with people you already know, even if the check sizes are likely to be a lot lower. One of the biggest mistakes first time fund managers make is miss-targeting LPs. Going after the wrong LPs is a colossal waste of time, and a big hit to the ego.
In my option, the ideal limited partner persona for a new manager has three attributes of overlap:
- Thesis/mission alignment: The LP must believe that your fund has the potential to produce risk-adjusted returns that align with their personal financial goals i.e.e, (outperformance vs. other investments) and interests(i.e.,co-investment opportunities, market insights, ESG mandates, etc).
- Affluence: LPs must be high net worth (i.e., accredited investors). Aim for LPs who are already comfortable investing in private markets and who are likely to have disposable income (i.e, asking for a $100k+ investment would not be offensive). Said differently, there is a difference between a doctor with three kids making $200k a year and an MD at Goldman Sachs who actively angel invests.
- Personal connections and mutual affinities: In some cases this could overlap with your fund’s thesis/mission (i.e., you both support immigrant founders), but more likely it will be related to shared experiences like employers, schools, mutual friends, organizations like YPO, or accomplishments like having passed the CFA.
Moving From 1st Degree to 2nd and 3rd Degree LPs
Despite my harping on the importance of 1st degree LPs, at some point, even the best managers will need to move to 2nd and 3rd degree connections. It’s very rare to close a $10MM+ fund without at least a few out-of-network LPs participating. The timing of when you start to approach 2nd and 3rd degree LPs matters. If your conversion rate on 1st degree LPs is weak, your conversion rate with 2nd and 3rd degree LPs will be non-existent. Therefore you want to think about 1st degree connections providing you with:
- practice
- proof points
- momentum
Don’t move to 2nd and 3rd degree LPs until 1st degree conversion is good. [The one exception here is if you have high-stakes 1st degree pitches and you want to dial-in your pitch with lower stakes LPs first.]
Just as investors teach founders, the best path to meet new LPs is via warm introductions. The most ideal warm introduction is from an existing LP (someone who has already committed to invest). Therefore, in some cases, it makes sense to let in a few “small check” investors, especially if they can open doors to LPs, or provide other strategic value.
At VC Lab we call the people who make warm introductions: “connectors”. Connectors serve two important roles:
- Making warm intros (and hopefully talking you up!)
- Helping you avoid general solicitation issues
In general when having a connector make the introduction, try and have them make it as low stakes a possible. Your goal is simply a meeting, not to get an investment. Keep in mind that every new LP conversation is an opportunity not only for investment, but also for new leads. Also keep in mind the power of ‘reciprocity’: connectors will be more likely to be helpful (and follow-up) when they feel there is some exchange of value. As an example, I have seen GPs offer to interview connectors in a newsletter, invite them to events, help with job searches, and more.
Another helpful concept I have observed is leveraging what I call “network leaders” or “super connectors”. Community is often just a buzzword these days, but when done right, community can be powerful. Think of network leaders as community members you’re recruiting to help propel your fund’s mission. Network leaders are not typically people you already know; they are often thought leaders and network builders in your space.
One of the most common ways to engage both connectors and network leaders is via events. I have seen both virtual and IRL events do well, but typically virtual is best for top-of-funnel and IRL is best for conversion. While old school, the GPs who I have seen close funds the fastest are those willing to drop everything and catch a flight to meet prospective LPs in-person.
LP Prospecting Strategy
LP prospecting is not all that different from B2B sales prospecting. It’s a bit of a numbers game, but process and intentionality makes a big difference. You should think of yourself as “running experiments” whether it be with targeting a new type of persona, or using a new take of messaging. Your audience will let you know what resonates best.
Most fund 1’s should probably divide their prospecting into a few stages:
- 1st degree HNWI LPs (high net worth individuals)
- Timing: Your first close, through 50%+ of fund total
- 2nd and 3rd degree HNWI LPs
- Timing: Post first close or 25% of fund
- Institutional Capital (most likely also 2nd and 3rd degree)
- Timing: Post closing half of fund
To be successful with LP prospecting you need strive to increase your luck surface area.
In practicality, this means you want to increase opportunities to build relationships, make new connections and given people a reason to engage with you. To help, you should ramp up your Linkedin skills, get a good CRM and build a content plan. Keep in mind, networking is not just a numbers game: quality over quantity. I have seen GPs with very little social media presence attract tons of interest from 2nd and 3rd degree LPs, and I have seen a GP with 25,000 Linkedin connections struggle. The GPs who do best are those who are able to build authentic relationships at scale. These GPs often have a personality that attracts others, but they also are empathetic with a help first, pitch pitch second mindset.
Next build a process. Once you have have 2-3 clearly articulated LP personas, start by finding Linkedin connections who matches your personas. Sign-up for Linkedin Sales Navigator and create lead lists that map to the personas. These lead lists are great because Linkedin will continue to passively add more matching profiles for you. Sales navigator will also help you identify the best intro paths into these LPs (i.e., by showing you what mutual connections and experiences you have in common). While messaging to prospective LPs is contextual, the expression “if you ask for money, you get advice. If you ask for advice, you get money” definitely holds true for GPs<>LPs relationships. Also, remember general solicitation rules; it might be tempting to send a pitch over Linkedin DM, but it’s likely against the law, and unlikely to convert.
→ Below is a recording I made with some LP prospecting exercises, and a quick Sales Navigator Demo. Interested in learning more? Join VC Lab.
Mid-Funnel Management
I originally heard the phrase mid-funnel management from Upfront Ventures Managing Partner Mark Suster in this podcast episode. Given Mark’s background in B2B sales, the phasing makes sense. A mid-funnel strategy acknowledges that the ‘hard work’ in closing LPs occurs after the first meeting. The real goal of mid funnel is to stay top of mind with LPs and to convey momentum, helping turn interest into hard commitments. In practice, a mid funnel strategy is your “follow-up” process. It’s tons of emails and calls, creating a regular newsletter, hosting events and promoting new investments. It’s your strategy to follow-up without seeming desperate and your strategy of inducing some LP FOMO. The mid funnel is an opportunity to re-enforce your GP differentiation, show you are executing against your plan/thesis, and communicate the additional benefits of being part of the fund (i.e., inviting LPs to events, sharing investment insights, etc). Finally it’s an opportunity to reduce investment friction. Examples might be LP education, reducing minimums, or perhaps offering ways for LPs to invest via their IRA accounts.
Finally, mid funnel is also about pitch refinement and ‘reading between the lines”. Maybe an LP is stringing you along with the prospect of a big check. After 3-4 meetings, assume they are out and move on. Maybe you are getting a ton of ‘no’s’ without much specific feedback. You must triangulate into what this really means: is you track record not there? Is your partner a weak link? Are you not effectively conveying your differentiation? Also, remember “feedback is a gift”. A lot of LPs will simply ghost you, or never provide feedback on why they are passing. Thus embrace all feedback, keeping a growth mindset.
For the best GPs, mid funnel doesn’t feel like work. They genuinely love building relationships and thinking about ways to serve their LP network. Mid funnel management is not sexy, but it does produce results.
Closing LPs
While I don’t personally have experience closing investors, I have seen the reality first hand. Soft commits are not the same as hard commits. The expression ‘time kills all deals’ is very true; move LPs to a close as quickly as possible. Don’t expect an LP who soft committed in August to still be gung-ho come December. To help this issues, VC Lab pioneered the use of the PACT (“Pledge Agreement for Capital Transaction”), a non-binding letter of intent, as away to hold LPs more accountable than simply verbal commitments. Whether you use a PACT, or not, ask LPs for the specific amount of their commitment, and then follow-up right after to confirm the amount in writing. While creating urgency in a fund close seems difficult, it’s possible. One good tactic is using multiple closes to lock-in LPs quickly after they commit. Fewer closes is not a badge of honor. Also, while difficult, I’ve observed GPs who maintain higher energy, obvious passion, and excitement tend to close faster than those who appear worn out, annoyed or lack excitement in their messaging.
Hopefully these insights provide a glimpse into how top GPs approach limited partner prospecting.