How to Raise a Venture Capital Fund

A Q&A with Gale Wilkinson of VITALIZE Venture Capital

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How to Raise a Venture Capital Fund

Emerging fund managers like Gale Wilkinson of VITALIZE Venture Capital are in many ways similar to early-stage founders, especially regarding raising capital.

However, while there has been much written and said about raising venture capital as a founder, there’s much less about raising money from LPs (Limited Partners) as an emerging manager.

Today, I’m excited to share with you a little behind the scenes as I think it’ll be helpful for both founders and investors.

Gale, who has been investing in startups for a decade and recently closed her second fund, was gracious enough to share some details, giving you an inside look.

Let’s get to it.

How much did you raise, how long did it take, and what was your target?

We raised $23.4 million. It took us two years to raise this fund. Our initial target was $50 million, but about one year in, we revised that down to $20 to 25 million so that we could continue to deploy the same strategy that worked well for Fund I. We realized that sometimes bigger does not equal better!

How many potential investors did you talk with?

We talked with about 600 potential investors. Half of these were institutional LPs with the remainder being mostly individuals and some family offices. We ended up with 77 LPs in Fund II.

How many LPs are watching your next fund?

There are nearly 400 prospective LPs on our quarterly update list who would like to stay in touch for Fund III. The majority of these prospective LPs are high-net-worth individuals and about 100 are institutions.

How much of the fundraise was in-person vs. online?

The majority of the fundraise was done remotely, which included primarily phone calls and video meetings. We scheduled several fundraising trips to cities including New York, San Francisco, Los Angeles, Austin, and Kansas City; these trips typically were for a GP / LP conference and a few individual meetings sprinkled in.

There was not a noticeable difference between virtual and in-person close rates, at least for a fund of our size. I do think that new VCs who want to raise from institutions in the future need to do a lot of networking and “be seen” by the LPs at these conferences so that their names and firm brands become more familiar to the funders over time.

What advice did you get from LPs?

Early on in our raise, we received quite a bit of advice from institutional LPs who told us that we needed to raise more money, deploy faster, get more ownership in each of the companies we invest in, and make sure that we do deals alongside well-known VCs.

It seemed that the majority of institutional LPs believe that there is one particular formula that works best for early-stage investing. It took me about a year into the fundraise to realize that our sweet spot is actually outside of this “preferred” approach, and I leaned into the fact that this is actually a positive thing.

It was at this time that we decided to only raise $20 to 25 million and continue our strategy of investing in 30 to 35 companies alongside lead VCs. We do not optimize for ownership percentage but rather aim to get into the best deals at the seed stage.

The individual LPs dug into prior performance, our team, and how much they resonated with our thesis. They didn’t give us advice but rather decided to invest if they thought it was a good fit after the first call.

What do LPs want to see from VCs?

At a high level, LPs are looking for at least a 3X net return on their capital invested. This corresponds to a VC performing in the top quartile. Some LPs will tell you that early-stage funds should at least return 5X net, corresponding to the top decile.

More specifically, LPs tend to look at a GP’s strategy, team, deal flow network, and ability to outperform when they make their go / no go decision on a fund.

What surprised you in the fundraising process?

The most surprising part of the fundraise was how long it took, especially after proving pretty strong performance from a decade of doing VC deals.

Raising a second fund is difficult because most LPs are looking to see what kind of performance metrics you got on the first fund. With early-stage investing, it tends to take seven to eight years to really know how a fund is going to perform, and you're often raising the second fund at three to four years in. So you’re in a bit of limbo land at the time of the second raise.

Another big surprise of this process was how many LPs asked for phone calls, in-person meetings, and/or access to our deal room and then never reached out or responded to us again. I would estimate that about 25% of the LPs in this bucket ghosted us. Very strange.

What do you think the future of LP capital is?

Going forward, I believe that many institutions will dramatically reduce the amount of capital going to the VC asset class. That which does get invested in VC will tend to be concentrated in the largest funds that are perceived to have the best networks. So we will see some multi-stage funds like A16Z and Sequoia continue to get bigger and bigger.

I also think we'll see more high-net-worth individuals wanting to invest in funds. This rise in retail investors will be the primary source of capital for funds up to $50 million in size. Individuals will be the backbone for the long tail of smaller funds to fuel innovation at the earliest stages.

Where I think we'll see the biggest change is in the funds of middle size, let's say $100 million up to $1 billion. With much of the institutional capital leaving the VC industry, it's these funds that will experience the biggest shocks.

What advice would you give to emerging fund managers?

I think emerging fund managers will always play an important role in the startup funding ecosystem. However, my advice to emerging fund managers is very different today versus a decade or even a few years ago.

If I were raising my first fund in today's market, I would probably opt to do a small fund of $2 to 10 million, investing in a niche area where I have unique and strong deal flow. At the same time, I would have an operating role at a startup within the same industry to further solidify the strength of my network and access to deal flow, and to ensure that I have some salary coming in to offset what would inevitably be low fees from such a small fund.

I think we'll see a lot of creative models like this coming from emerging managers in the future, which is a good thing. VC is not an easy industry, but I think the emerging managers who stay authentic to what they know and love and where they have an advantage will always thrive.

How did you stay sane during this fundraising process?

I'm lucky to have a strong team at VITALIZE, which was incredibly helpful during the 2-year raise. I also leveraged phone-free morning and evening dog walks with my yellow lab and GSD-cattle dog mix puppy as ways to stay sane.

Are any times of the year better or worse for closing investors?

I’d say that August, September, November, and December are probably the hardest months of the year to close new investors. The best months are probably March, April, May, and October. However it's really tough to nail timing exactly right, so I think the most important thing is to create a structured process that can be repeated each week regardless of time of year.

How do you think raising a fund as an emerging manager compares to a founder raising from VCs?

This is a fun question, and I have to preface my answer by saying that I have never raised venture capital as a founder. However I have done 125+ institutional deals in the last decade, so I have been around many many founders who have successfully raised. In fact, one of the biggest ways we provide assistance to founders within the VITALIZE portfolio is introductions to other VCs.

My belief is that an emerging manager raising Funds I, II, or III is similar to a founder raising a pre-seed or seed round in that it takes a lot longer than we would like! The average founder takes six months to raise a round while the average emerging manager takes two years to raise a fund.

I think the main difference between the two is competition. If a founder is raising for a specific company (i.e., AI-based hiring, security compliance software, etc.), there are a relatively small number of incumbents and startups that would be direct competitors (typically 5 to 25 is what we see in our diligence). For a fund manager, there are literally thousands of direct competitors doing roughly the same thing, so competition becomes a lot more crowded for LPs.

The main problem that emerging managers have to solve is how to prove their unique and authentic differentiation, whereas founders have to prove that their startup can get strong traction, and their offering resonates with a specific target customer. Both are difficult to do at the end of the day!

If you were raising a fund now, what would you do differently?

We will go out to raise Fund III in about 18 months. There are a couple of changes we will make. This time around, we’ll focus almost exclusively on individual investors. In advance of the raise, we’ll continue adding individuals who opt in to our quarterly email updates so they can get to know us over time. I've learned that the most important thing in early-stage investing on behalf of limited partners is to build trust and to do everything possible to be a good fiduciary.

Any VC, including emerging managers, should always think about their networks. This includes the deal flow and founder network, but also their network of capital providers (limited partners). It's advantageous to always build both sides of these networks in a way that is unique, differentiated, and authentic. VCs who do this well have the highest likelihood of continued success!

I hope you enjoyed this departure from our regular scheduled programming 😜 

I’d like to publish more Q&A editions in the future in addition to the 5 Lessons series and Founder Profiles, but let me know in the poll below what you think of this one. It’d be great to bring on more founders, operators, and investors to share their insights.

Also, if you’re interested in starting your investor journey as an angel investor, check out VITALIZE Angels, led by Gale and the team at VITALIZE Venture Capital.

You’ll become a smarter investor, access top deals, save hours on due diligence, and have a lot of fun doing it.

The application deadline for their next cohort is January 25th. Apply below:



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