Top mistakes first-time fund managers make

Our first three editions have focused on what fund managers should do:

• How to raise from LPs
• How to create a fund deck that closes LPs
• What questions to ask founders

But knowing what not to do is just as important. In this post, you’ll hear from nine experienced GPs and seasoned LPs on the biggest mistakes they see first-time fund managers make. To make this post actionable, we’ve included lessons alongside each mistake. Our goal is to help new fund managers best position themselves to build a successful fund by avoiding common mistakes.

Of course, reading about these mistakes is no substitute for making your own. As with founders, experimenting, learning and iterating is an important part of building a successful fund. It’s also worth acknowledging that much of this advice is subjective. There are many ways to play the VC game and another GP’s strategy may not match your own. In fact, you probably shouldn’t blindly copy another fund’s approach (the best strategies can’t be copied!) but instead double down on your unique differentiation.

If you only have a few minutes, here’s TL;DR of ten lessons (more in the full post) learned from the most common mistakes first-time fund managers make:

• Have a clear long-term vision for the firm you’re building
• Align your fund size with your fund strategy
• Design a portfolio construction plan that enables you to deliver on your fund strategy
• Get comfortable with LP timelines (and lots of no’s!)
• Have (or secure over time) enough ownership in winners to return the fund
• Double down, triple down (or more) on winners
• Avoid pricing out strategic, helpful LPs with high check size minimums
• Don’t pass on an investment because it looks “strange”
• Communicate clearly and consistently with LPs – they’re the ones that keep you in business
• Never count a portfolio company out

Shout out to Beezer Clarkson (Sapphire Partners), Bubba Murarka (Eleven Prime), Courtney Reum (M13), Harry Stebbings (20VC), Kyle Samani (Multicoin Capital), Nikhil Basu Trivedi (Footwork) and Terrence Rohan (Otherwise Fund) for contributing to this post.

Long-term vision

“I think a lot of fund managers fall short on thinking about the long-term vision of their firm (funny considering how much we weight the long-term vision for the companies we invest in). Most don't know what they want their Fund 3, 4 and so on to look like, let alone fund 10. This lack of intentionality around the long-term vision leads to issues in partnerships, generational transition, junior hiring, culture and lots of other areas as the firm evolves.”

— Nikhil Basu Trivedi, Footwork

Lesson: As a fund manager, you are also a firm builder. Having a clear long-term vision for the firm you’re building guides strategic decisions like your investment focus, fund size, team, and more. Of course, this vision will evolve as you invest, learn more about the kind of investor you want to be, and what’s working through feedback from founders, LPs, and the broader market.

Audience building

“Write. Writing is by far the most scalable way to engage the public at large.”

— Kyle Samani, Multicoin Capital

Lesson: Writing can be an extremely effective way for first-time fund managers to attract the founders, companies and co-investors they want to attract.

Minimum check sizes for LPs

“I see a lot of new fund managers make this mistake: they put a minimum check size upfront for new LPs. This prevents many from digging deeper from sticker shock. Also the smallest LPs have brought the biggest co-investor checks in my experience.“

— Harry Stebbings, 20VC

Lesson: Smaller LPs can be extremely helpful with sharing deal flow, helping portfolio founders, co-investing in opportunities, and more. Furthermore, warm LP intros from people that are investing in your fund are often the best kind of intros. An LP writing a $10K check might introduce you to an LP that writes a $1M check. Many fund managers instrument minimums to avoid exceeding a 99 LP cap, but there are ways to structure the fund to increase this limit. Read about how we raised from over 350 LPs for Weekend Fund 3 here.

Objectives with LPs

“If you want to pitch an LP, say so in your outreach, rather than being vague with a ‘let’s catch up.’ This will save you and the LP time as well as set the table for a more productive conversation. Some LPs might be ok with a surprise pitch, others might find it a turn-off.”

— Beezer Clarkson, Sapphire Partners

Lesson: Like GPs, LPs have limited time and receive a flood of inbound requests from those raising, so be direct about your objectives when reaching out to LPs. If you want to pitch them for a raise, say so. If you want to start building a relationship for future raises, say so

Institutional LP timelines (and lots of no’s!)

“Much like how GPs must say no to most founders they meet, so do LPs. A ‘no’ for this current fundraise does not mean a ‘no’ forever. While LPs investing their own money can move more quickly, institutional LPs may need weeks, months or even years to see a full fund cycle play out. Many LPs like to get to know GPs over the course of one of two funds so approach the pitch as the beginning of a relationship, not a one-time transaction.“

— Beezer Clarkson, Sapphire Partners

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“Don’t expect institutional investors to come on board early. Realistically, very few institutional investors will be willing to invest in your first fund, unless you are extremely pedigreed and/or have an exceptional prior track record that they can evaluate. For those new VCs who do not possess that type of background or track record, most of your time is probably better spent trying to raise capital from other types of LPs. However, it can still be worthwhile to take some meetings with a targeted shortlist of institutions, with the expectation that the purpose is more for relationship-building. Keep those people apprised of what you are doing, and once you have a more concrete portfolio and track record for them to evaluate, you will have a higher hit rate with them when you try to raise your second or third fund vintages.”

— Anonymous investor, top-tier institutional LP

Lesson: While we shared some tips on how to create urgency with LPs in our post on How to Raise from LPs, it’s important to be respectful of institutional LP timelines and know your audience.

Misaligned fund size with fund strategy

“When Carter (Courtney’s partner at M13 and his brother) said he wanted to raise a fund, I thought 'Ok, maybe we can do $50M’ and then he said he wanted at least $100M, and up to $150M.  I thought he was crazy and had very little shot but, to his credit and sheer will, we did. Actually, we raised close to $200M as a first-time fund who were technically not full-time VC’s prior. In hindsight, I think we should have made sure our strategy fit the raise size but luckily it’s worked out very well for that fund and our subsequent one.”

— Courtney Reum, M13

Lesson: Align your fund size with your fund strategy. A larger AUM is appealing and has many advantages but there are also tradeoffs. This is one of the most important decisions a GP will make as it informs the number of deals, check sizes, management budget, and many other variables for the next several years.

Ownership in winners

“Fund I’s are typically a learning process. GPs are figuring out who they are as an investor, getting their name out there, winning deals, etc. As part of this learning process, we see many Fund I’s with too small ownership in companies, so even if the companies are performing, it would take a gigantic exit to move returns. While it can be hard for a Fund I investor to always maximize ownership or dollars into a company – it’s important to understand the trade-offs one is making between fund construction and getting into great deals.

Another reason many Fund I’s may have sub-sized positions is if a manager begins to deploy capital while still fundraising. After a first close, an investor has to choose if they will write checks, assuming they will raise the full fund size, or write checks based on only what they have closed on.

Given there are a lot of learnings during a Fund I, one hedge is to keep the overall fund size on the small side. This is one way to have strong returns and carry them with you for a larger Fund II.”

— Beezer Clarkson, Sapphire Partners

Lesson: Be thoughtful about the trade-off between ownership and squeezing into competitive deals. Ideally, every company you back can return the fund (or more), although this isn’t a blanket “rule” and ultimately ownership targets should be established in your portfolio construction (more on that below).

Doubling down on winners

“We've missed out on tremendous financial upside by not doubling down on portfolio startups that went on to become multi-billion dollar companies. At the time, the valuation of companies that went from Seed to Series A seemed inflated, often 5x our initial entry price in less than six months. This steep appreciation created a price anchor but we really should have focused on the long-term upside and our confidence in the company. Of course, hindsight bias makes every pass in a future unicorn look foolish but buying more ownership in breakouts is one of our biggest financial mistakes.”

— Ryan Hoover, Weekend Fund

Lesson: Buying (or maintaining) ownership by writing multiple checks over the life of the company can have a major impact on the fund’s performance. As an investor, you typically have more insight into how well a company is doing, giving you an advantage in spotting and getting access to portfolio breakouts. Securing pro-rata rights when making your initial investment can help but ultimately you should plan to earn your right to invest in future rounds by being genuinely helpful.

Portfolio construction

“Specifically, a lot of first-time fund managers don’t have a clear portfolio construction that matches their strategy and capabilities. GPs should ideally have a clear blueprint in their minds for parameters like how many deals they want to have in their fund, distribution of check sizes, mix of company stages, and initial checks vs. follow-ons. These numbers must make sense in the context of the overall strategy, team size, and firm capabilities, which will help inform important high-level choices like fund size, deployment pace, and how much capital to leave as reserves before seeking to raise the next fund vintage.  For instance, if you want to focus on pre-seed, you will want a sufficient number of deals to help diversify the likely high loss rate. On the other hand, if you aim to be a high value-add to your portfolio companies, you can't do so many deals that you run out of bandwidth.

You also need to match your check sizes to your right to win.  If you plan to write lots of large checks into Series As, but you don't have the brand or value-add to legitimately earn capacity vs. the VCs you expect to compete against, that may not be workable, or you may subject yourself to negative selection bias. Also, don't forget to account for your expected management fees and other fund-level expenses over the life of your fund. You may have less investable capital than you realize, although recycling can help with this if you get some early liquidity. As a final check, you need to ask yourself whether the portfolio construction you have laid out can plausibly produce the returns you are seeking, given the hit rate and size of outcomes that you expect.”

— Anonymous investor, top-tier institutional LP

Lesson: Have a clear portfolio construction plan that enables you to deliver on your fund strategy. Portfolio construction has a lot of variables that should be modeled out with realistic assumptions. We’ll publish a template on this topic in a future edition of Signature Block.

LP updates

“Clear, regular, and detailed LP updates help significantly in creating strong GP-LP relationships. LPs want to know you’re in touch with your portfolio and you have a full assessment of its health: cash runway, pacing information, ownership, who was in the round, why you did the deal, how you found it, and how the company is doing.”

— Beezer Clarkson, Sapphire Partners

Lesson: GPs should keep their LPs informed on how we’re investing their capital. Clear, consistent LP updates establish trust and may encourage LPs to write a check in consecutive funds. As a bonus, these updates are an opportunity to put LPs to work for the portfolio and remain top of mind for future deal flow. Read about How we write LP updates at Weekend Fund.

Counting a founder out

“I'm reluctant to admit that I lost confidence in some portfolio companies' ability to succeed. Many startups face monumental challenges and seemingly hopeless moments, resulting in stagnant (sometimes negative) growth or a complete reset. Many resourceful, driven founders we've backed have overcome these challenges, pulling rabbits out of a hat.”

— Ryan Hoover, Weekend Fund

Lesson: Support every portfolio company, not only because it's the right thing to do, but because each one might be your fund returner. Disengaging with a portfolio company may harm your ability to double down on the breakouts, as mentioned earlier.

“Strange” investments

“The exact recipe for a $1B mistake: avoid investing in an incredible founder doing something that is poorly understood or looks strange.“

— Terrence Rohan, Otherwise Fund

Lesson: The future is hard to predict. It’s often hard to imagine looking forward, but obvious looking backward. While evaluating companies, ask yourself “so what if this works?” We included some questions to ask founders on this topic in our last post.

Investing without social proof

"We weren’t confident enough to lead deals initially. I think this is obvious but at first, we were really impressed by who else was interested in a deal. We also tried to push this ‘1 and 1A’ approach where we wanted to partner with other top-tier firms. It took about a year to get there, but we finally started to trust our own judgment. Also, when you’re leading, deals are competitive so there are a lot of times when we couldn’t “share” a deal and make it work for everyone. Half a billion later, I would say we lead 80%+ of the deals we’re in.”

— Courtney Reum, M13

Lesson: While social proof can be a valid signal, it’s necessary to be confident enough to invest without social proof from other investors, especially if you’re leading deals.

Sourcing strategy to lead deals

“When you start investing see as many deals as you can however you can source them: your networks, demo days, AngelList, etc. Once you start leading deals, setting terms, and taking 50%+ of the round, you need to radically change how you source your deal flow. My advice is to try and get to 80%+ outbound by going to founders working on problems in your areas of expertise (bonus points for hitting up ‘potential’ founders working at mature startups). If you don't do this, it’s much harder to have an ‘edge’ as a lead investor!”

— Bubba Murarka, Eleven Prime

Lesson: If your goal is to lead deals, you’re ultimately competing for a single spot (vs. multiple spots when writing smaller checks). Relying entirely on inbound deal flow may magnify negative selection bias for lead investors. Instead, invest more in outbound and hunt for the next opportunity through your network, proprietary data sources, and other creative channels.

First Close

“If you have money committed early in the process, do an early first close. It puts you in business.”

— Terrence Rohan, Otherwise Fund

Lesson: Do a first close to start “executing” on your fund. Doing multiple closes can also help nudge LPs to wire in time for the next close.

If you’re a new fund manager, thinking of starting a fund, or just curious, subscribe to Signature Block if you haven’t already. If you think this might be useful for emerging managers, share on Twitter.

Lastly, let us know what topic you’d like us to cover in the next edition.

Until next time,
‍Ryan and Vedika from Weekend Fund :)