A Look Behind The Curtain: New Data On How VCs Raise Their Early Funds
An inside look at how successful VCs are courting the small world of big investors.
At DocSend, we spend a lot of time analyzing the data behind what it takes for startup founders to market their ideas, land meetings with VCs, and in turn source and close deals — from pre-seed to Series A.
While we’re passionate about helping founders turn their ideas into flourishing businesses, we also recognize the massive challenge that VCs face when raising their own early funds by courting the right limited partners (LPs) to get off the ground. The good news for aspiring VCs is that the investing world is no longer completely dominated by a small, niche circle of investors. Advancements in technology, new capital accessibility, and evolving ways of working have begun to democratize the international investor community.
With many of the traditional barriers to fundraising becoming less daunting, early-stage VCs need to find ways to break through the static and reach the LPs that will get their funds up and running. To get a better understanding of what is working in the new world of VC fundraising, DocSend recently surveyed partners from 46 opt-in VC firms for our new research report: Looking behind the curtain: How VCs raise their early funds.
While it’s important to note the relatively small sample size in this survey and that not all VCs will have the same experiences fundraising, the data holds valuable insights into a historically closed-door process. After analyzing the data behind their fundraising experiences, we’ve identified three trends all fundraising VCs should bear in mind before picking up the phone — or really, jump on the Zoom meeting.
Don’t try to net every fish in the sea, just the right fish
The democratization of the global VC community means that more early-stage fundraisers are on the hunt for potential LPs than ever before. But does it make sense to cast a wide net and contact as many LPs as possible? Our analysis shows that the “numbers” approach may not be the most effective.
If expanding your network and practicing your pitch are important to you, you may benefit from pitching a larger pool of investors. But if securing funding in a timely or efficient manner is your priority, you’re better off taking a more strategic approach to who you reach out to. The graph above shows a definite point of diminishing returns when contacting LPs, somewhere around 60–70.
It’s also important to keep in mind that taking more meetings doesn’t necessarily result in raising more money in exchange for the time and effort committed by you and your partners. One small firm in our survey averaged over $5 million per meeting from only a dozen meetings. Whereas at the other end of the spectrum, a boutique firm averaged only $100,000 per meeting from 100 meetings.
While it depends on your firm and your overall strategy, early-stage fundraisers would do well to “pitch smarter” and make quality approaches to potential investors rather than focusing on sheer quantity.
Hit the ground running, but budget for the long haul
What kind of time commitment does the fundraising process require? For first funds especially, the data indicates it can take many months.
Again, it depends on the nature of the firm (niche strategies can take longer to fundraise than more general-strategy firms) but persistence is important. While things could come together more quickly, it’s best practice to budget for at least 6 months of fundraising, if not more
A key takeaway from our analysis is that although early-stage VCs should focus on quality pitches to well-targeted LPs, they do not necessarily have to rush back to the drawing board if the process takes longer than they initially hoped.
Find an anchor LP to champion your firm
An anchor LP is an investor that commits a significant amount of the total capital to the fund upfront, usually around 25% for first-time funds. If you’ve never raised a fund before (or if your last one didn’t pan out as you hoped) an anchor LP can give you the credibility you need to land more investors. According to our sample, the average fund had 28 LPs, so getting one credible name on board early on can go a long way in securing the rest.
The average amount the anchor LPs took in a first-time fund
While the share of the funds the anchor takes can be significant, the right LP with industry credibility can be a shot in the arm for your fundraising efforts and significantly shorten your fundraising timeline.
Do your homework, master your process
VCs raising early funds have plenty of tools to deploy, from leveraging existing professional networks, taking advantage of prior exits, and (of course) understanding the data on what has worked for their peers.
DocSend provides a competitive edge in the fundraising process. Our data reveals new trends and helps demystify metrics, allowing VCs to focus on what they do best: making their voices and investment strategies heard in an increasingly crowded global marketplace. To learn more about the fundraising landscape, check out the full report on DocSend.com.
How do your experiences fundraising match up with our sample? We’d love to hear from you either in the comments below or as a guest contributor on our blog at DocSend.com. Contact us at research@docsend.com to learn more.
