Navigating big and small checks while fundraising

The SEC has lots of rules when it comes to venture capital. One that I find particularly annoying is the rule that a VC fund can have up to 99 investors (limited partners).

Why is this so annoying?

Because it affects the average check size that a fund manager can accept.

Today we're gonna dig into this topic and talk a bit about how to overcome the challenges it creates.

Why this rule is annoying (in more detail)

Let's say that you're a fund manager trying to raise a $10m fund.

You can only accept checks from up to 99 investors, which means your average check size would need to be $100k. This assumes you and your co-GPs are putting in a collective $100k. If you're not putting in anything (unusual) your average check size from LPs would be about $101k.

But if this is your first fund, you're probably raising from angel investors and family offices. And not everyone you pitch will be able to commit $100k.

So you have two options:

A. You could reject everyone who wants to support you but who can't afford a $100k check

B. You could accept some smaller checks and hope you can bring in other investors at a higher check size to cover the difference

Option A is not a great option.

The thing is, when you're a first-time fund manager – and especially when there's steep competition for LPs – it's hard to get commits for $100k checks.

Feels a bit obvious, but I'll say it anyway: It's easier to get commits for smaller checks, like in the $10k - $25k range.

But if you start accepting small checks, you're left with the bulk of your fund left to raise, and fewer and fewer investor slots left on your cap table.

This means you'll need to increase your average check size, which decreases the pool of potential investors even further.

So what to do?

I'll share a strategy that Hustle Fund's GPs used when they were in this boat.

They started off with a relatively low minimum check size (like the $10k - $25k we talked about earlier).

But they used the limit on number of LPs as a way to kickstart fundraising momentum.

They told the prospective investors that they would have to limit the number of small checks they accepted, otherwise they wouldn't hit their target fundraise amount.

Any LP that wanted to get in at this lower entry point would need to act quickly or risk:

a) facing a higher minimum, or

b) being locked out of the fund altogether.

This strategy created a sense of urgency, which resulted in the smaller checks coming in faster. That in turn lead to momentum with other investors, which ultimately led to the closing of Fund I.

There is an option C...

...which involves filing a notice with the SEC that allows fund managers to accept more than 99 investors in their round. You can read more about that here.