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How first-time funds can attract stellar LP investments

It’s easy to see why people are drawn to venture capital: It’s fast-moving, exciting, and it gives you the chance to make a real difference in your industry. But raising money for a first-time investment fund is often a tough, uphill battle.
lp investments

The struggle in raising money for a first-time investment fund lies in the difficulty of convincing limited partners (LPs) to take a gamble on an untested fund, when even well-established funds aren’t guaranteed to turn a profit. In fact, a whopping 95% of all VC firms aren’t profitable. Gathering enough LP investment can take several years and hundreds of meetings, even if you’re just raising a microfund (sub-$100MM).

But don’t let this discourage you. Many first-time funds are able to meet their goals by broadening their networks, honing their pitches, and creating a sense of urgency for potential investors. Here is how you can build your fund by attracting great investors.

Work all your connections

Deep-pocketed potential LPs like investment indexes and retirement funds are too conservative to take a chance on first-time VCs. In order to raise your fund, you’re going to have to think outside of traditional fundraising channels. Instead of trying to score these big fish, focus on raising funds from individuals, family offices, and corporate investors.

Many investors don’t respond well (or at all) to cold calling or emailing, so it’s time to leverage your network of personal connections. You will have the most luck fundraising from people you know or people just two to three degrees of connection away.

Draft up an email explaining what you’re working on and the potential investment opportunity. Send it to your personal network. If people are interested, set up a meeting. If not, ask if they know one or two others who might be. Ask for personal introductions, either via email or in person, if possible.

Try other LP investment channels

While the bulk of your funding will most likely come from people in your personal network and their connections, there are a few other sources you can use to raise interest in your fund:

  • AngelList: The startup community website has tools to help investors build and advertise their funds. First-time funds sometimes use the website as a kind of incubator for attracting early funding deals.
  • Proprietary databases: Parsing data from companies like Pitchbook and Crunchbase can help you zero in on LPs who are historically likely to invest in funds similar to yours. With that information, you can create a list of likely candidates to approach and pitch. This data is very pricey, so make sure you have a strategy for using it before you buy.
  • Founders: Startup founders who you’ve worked with in the past or have previously invested with are a good resource for raising reciprocal funds or requesting connections.
  • Industry events: During fundraising, you’re basically always selling your fund. Business and social events are the perfect opportunities to meet potential investors. You aren’t likely to close any deals at a cocktail party, but practice your 30-second elevator pitch and be prepared to follow up later.
  • Family and other non-traditional investors: Not all LPs need to be “in the business.” Anyone with an interest in what you’re doing and some money to invest is a potential investor. Family and friends may be interested in what you’re working on and may want to invest themselves, or they may know other people who might.

Be prepared for the pitch

Once you score some meetings, make the most of them by ensuring your LP investment pitch is persuasive, knowledgeable, and that it showcases what makes your company unique and worth a potential investor’s time and money. Since your fund is new, you won’t have past institutional success to rely on. Instead, you’ll need to impress investors with your personal background, philosophy, and investment savvy.

Most experienced LPs want to know the same things about potential funds, so come prepared to answer the most common questions. What is your team’s track record (either together or as individuals)? How well do you work together? What’s your portfolio-building strategy, and how do you select investments? Investors want to know that you’ve thought your plan through and that you’re competent enough to execute it.

Additionally, prepare a persuasive pitch deck to present to potential investors. Your primary goal with the deck is to get your story out to investors. There are thousands of aspiring VCs out there. Why should LPs invest with you, specifically? To convince them, you’ll need to tell a differentiated story: What sets you apart? Is it your approach to fundraising? Your investment strategy? Your ethics or social investment?

Show momentum

Without a history of proven results, one of the best ways to generate buzz and interest in your fund is to create a sense of urgency. Elizabeth Yin, co-founder at Hustle Fund, refers to this as FOMO, and she relied on it heavily to raise $11.5 million for her VC fund.

One of the easiest ways to create the illusion of momentum is by scheduling multiple fundraising meetings at once. Investors will be more interested if they know you’re taking multiple first and second meetings with other investors. Think of it as creating your own buzz.

When you’re just getting your fund off the ground, it’s okay to take a handful of small investments, say $5,000 or $10,000, just to get momentum moving. Generate more upfront investors with a smaller minimum check size, then raise the minimum as you get closer to your goal.

Once you get some commitments, leverage those as social proof for other potential investors. This also amps up the FOMO factor (“Get in for this price while you can!”). Just remember that many funds max out at 99 investment slots, so don’t take too many small investments.

Make sure LPs are a good fit for you

When you’re just starting out, it’s tempting to take every meeting you land and just hope something pays off. This is actually not a very effective approach. Not every investor will be a good fit for you and your brand. Work more strategically and save yourself time by researching investor fit before you pitch.

Sapphire Ventures managing director Beezer Clarkson said it best regarding LP investment: “LPs are like snowflakes, each subtly different from the next and not just in the size of their checks or their willingness to bet on an emerging manager. Think about what value you want your LPs to bring and the role you need them to play.”

Gather as much information as possible on potential investors: What are they passionate about? Who have they worked with in the past? If they have a website, read it. Read any articles they’ve written and scope out their social media.

When you meet with LPs, don’t be afraid to ask questions to help qualify their interest and fit with your fund. You don’t want to waste valuable time courting uninterested parties. Instead, focus your efforts on people who are a good fit for your fund.

LP investment is a numbers game

Venture capital fundraising is a long game: It takes an average of two years to raise a microfund. During that time, you will be constantly pitching potential investors.

Keep yourself sane and organized by taking advantage of DocSend’s tools for venture capitalists. Secure link sharing is the ideal way to securely share pitch decks and other materials with potential LPs. Document analytics show you which investors have taken the time to look at your pitch decks and which ones are showing less interest, so you can zero in your efforts on people who are as enthusiastic about your fund as you are.