Advice for Raising Fund II

Last week we talked about problems VCs face when raising fund II:

  • Your Fund I companies might not have markups yet
  • You may not have a strong TVPI
  • It's hard for founders to raise right now

If you missed that article or forgot everything you learned, you can read it here.

Today we're gonna dive in to advice for anyone raising Fund II. We'll cover:

  • Why it matters who you raise from
  • How long it'll take to raise Fund II
  • Advice about closing your fund

This advice comes from Hustle Fund GP and co-founder Eric Bahn. Eric led the charge on all three of Hustle Fund's fundraises, as well as fundraising for his own startups. He's also a huge asset for Hustle Fund portfolios looking to raise.

Let's dive in.

#1: think about who you're raising from

Quick reminder: Limited Partner, or "LP", refers to investors in your fund. Ok? Cool, let's keep moving.

There are three types of LPs that typically invest in funds. 

1. High net worth individuals. These are basically angel investors.

2. Family offices. These are family entities, often with generational wealth, that invest under one umbrella.

3. Big institutions. These could be universities, pension funds, insurance companies, etc.

As you're thinking about raising Fund II, it's worthwhile to consider which of these groups you'll be raising from.

See, institutional LPs typically want to see that your Fund I has returned a decent amount of money to your existing investors. Or they want to see that you have a healthy TVPI, which are the paper gains of your fund (more on that here).

But as we discussed last week, there's a good chance that your Fund I companies haven't seen big exits or big markups yet. It's just too early. 

If this is something you're running into, then it's probably best to focus on raising your Fund I from high net worth individuals and/or family offices.

Those groups tend to be more tolerant of investing based on your vision and your thesis, kind of like when you raised Fund I, rather than focusing mostly on your returns.

#2: Change your expectations on timeline

This is a hard truth for some VCs to stomach... it's probably going to take much longer to raise Fund II than it did for Fund I.

This is the case for a few reasons.

First – the due diligence process is more intense for Fund II. This is because you have actual data for LPs to look at. You're not just raising based on your dream and your vision.

You've made actual investments, and LPs will want to dig into your portfolio in more detail. 

They may want to talk to some of your portfolio founders, and/or your earlier investors.

All of that takes time.

Second – because we're in an economic downturn right now, LPs are being a bit more conservative with their cash. So they may not commit as large checks to your fund, AND they may take longer to decide if this is the right investment for them.

In general, you should expect it to take 18-24 months to raise Fund II.

#3: do lots of closes

Eric's last piece of advice for VCs raising Fund II is to think about doing more closes.

Now, doing multiple closes on a fund is a pretty common thing in the VC world. If I'm raising a $100m fund, a traditional method of fundraising is to split that up into two $50m closes.

This means I can start deploying money out of the fund while continuing to fundraise.

I'll say that again because it's worth repeating.

If I close $50m of my $100m fund, I can start investing that money before I finish fundraising.

This allows me to bring amazing founders into my portfolio, and attract more LPs to raise the remaining $50m of my fund.

But Eric's advice to VCs raising Fund II is to do way more than two closes. He suggests you do around 5 closes.

This is what Hustle Fund did for our own Fund II fundraise. And we chose this strategy so that we could invest in high-growth startups and show very quick markups to prospective LPs.

While historically some investors saw multiple closes as a negative signal ("why can't you get LPs?!"), things are changing in the VC world. There are more funds popping up every day, so more competition to raise from LPs. 

It's much more common nowadays for a VC to do many closes before officially wrapping up their round. 

More things to consider

There are two other big topics when it comes to raising your fund:

1. Warehousing deals

2. Buying logos

We'll cover both of these topics in the next few weeks... stay tuned.