We raised $174 million in 3 years for Harlem Capital.

We started with no prior VC experience and a strategy many questioned.

Here’s thread on what limited partners (LPs) are looking for when they invest in a VC fund 📝
While VC funds can generate outsized returns, LPs have a tough job

They are giving fund managers (GPs) a blind pool of capital. There’s no guaranteeing what the fund will invest in

They are betting on people who bet on people

They likely won’t get their money back for 10+ yrs
Know who LPs are & have empathy:

Endowments - Universities / nonprofits
Foundations - Nonprofits that fund grants
Pensions- Retirement plans
Funds of Funds- Invest in other funds as main strategy
Family offices- managing money for families
Individuals- investing their post-tax $
LPs are focused on three key things:

1. Team
2. Strategy
3. Track record

These traits help them build trust in a fund manager and conviction that they will generate good returns.
Team:

LPs want to invest in GPs who can execute, find great investment opportunities, and manage a fund.

LPs prefer that these managers have relevant experience.

They want managers who can hire talent, are committed to the fund long-term, and won’t have an ugly breakup.
References are a HUGE factor for LPs to get comfort with a fund manager.

LPs may chat with former colleagues, VCs, or anyone they have in common with the GP. They assign a lot of weight to the opinion of other LPs or founders the GP has invested in.
Strategy:

MOST IMPORTANT- how GPs will find great founders to invest in and add value post-investment.

The strategy should be differentiated, but similar enough to strategies that have already worked

Most VCs funds have focused on industry, geography, or stage to differentiate
Portfolio construction is critical to success. It includes:

# of companies
Check size
Target ownership %
Follow-on strategy

At best, only a handful of companies will do really well. LPs want confidence that VCs can generate significant profits from those handful of companies
There are many portfolio construction strategies.

Diversified portfolios: investing less $ in many companies.

Concentrated portfolios: investing more $ in fewer companies

The irony for us was LPs asking about portfolio construction was a sign that the meeting was going poorly
Institutional LPs prefer concentrated portfolios (<30 companies).

They have diversification among funds, so they want to increase the chance that a VC who invested in a huge winner like Uber or Facebook owns enough to significantly increase the value of the LPs whole portfolio.
Track record:

LPs generate want to back VCs who:
1. Have managed money / generated returns. Fund 1 is hardest to raise
2. Have VC experience from top firms
3. Have run high-growth companies before (operating experience). Operators have empathy and often great sourcing networks
Without a track record, GPs have to have some other competitive advantage for their strategy.

Aspiring VCs may invest in companies through SPVs to build a track record

Others may invest their own capital as angels. Harlem Capital positioned our 6 angel deals as our track record
We had established a brand, network, and sourcing funnel before we started raising money.

We made the case that because we were focused on underrepresented founders, working at an established VC firm wouldn't help us get any better at sourcing.

We thought the timing was perfect
FYI - VC fees are standard:

GPs charge LPs an annual management fee of 2% - 2.5

Management fees are often reduced to 1.5% or less after 5 yrs or a new fund is raised

GPs charge 20% of profits (carried interest)

If you ask for anything higher, be prepared for a lot of pushback
I learned this info from 100s of LP meetings, other VCs, and listening to podcasts

The most important things for a new VC

-Have a compelling sourcing strategy
-Get advice from successful VCs
-Position your track record well

If you liked this thread, follow me at @jarridvtingle
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