42/52: The builders are building. Get ready
#CapitalAtRisk
The 2010s was the decade of the Entrepreneur. The 2020s will be the decade of the Investor.
“There is no glory in projects that will probably succeed, for these by definition won’t transform the human predicament”.
Sebastian Mallaby
Welcome to new subscribers…
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VC Lab refresher
I wrote a little about it here, but essentially the VC Lab programme I’m part of is a 16 week sprint for new venture capital fund managers to accelerate the raising of their first VC fund.
Adeo and his team want to help launch the next generation of VC firms. As I said in that 37/52 Lab rat post, that’s firms, not funds. So while the VC Lab programme is is all about accelerating new managers to a First Close Date (FCD) of their Fund I it’s only for people who want to create a VC firm, not just a VC fund. So that means Fund I will be followed by Funds II, III, IV, V…
The Thesis
Selection for the programme was pretty competitive — many thousands applied, Week 1 started with a few hundred but now, about halfway through, we’re down to less than half that.
The first few weeks was all about ‘The Thesis’. And, as I’ve been thinking about all this since 2012, I thought: Easy — I’ve got this.
But no. I do like to craft written messages — I really, really try to get the words right in emails, and I enjoy doing that — but this was on another level.
The thesis is the strategy by which a venture capital fund makes money for its fund investors, the Limited Partners, or LPs1. A fund Thesis is not for public consumption, it’s for LPs only and, in the VC Lab world, should be less than 40 words, preferably 35. Within that a VC has to mention the fund name, size, geography, investment stage, sector (or other) focus and, crucially, the secret sauce.
The secret sauce — the USP — has to link back to the targets, so has to answer the, “OK, so you’re going for those kinds of deals… why will you be able to find, evaluate and have your capital accepted by them?” question.
That’s much, much harder than it sounds and involves lots of, err, candid feedback from Adeo and Mike.
I think I’ve got there now.
The PACT
The whole point of getting the thesis right is so VCs can talk to potential LPs and get to a ‘signed PACT’.
A PACT is essentially a Letter of Intent. PACT stands for ‘Pledge Agreement for Capital Transaction’ and is a non-binding agreement with a bit of light confidentiality stuff in there to say, “Yeah, I might be keen on being an LP in your fund and I’d consider investing £x”.
So, like startup founders are told to “talk to users”, VCs are told to “talk to LPs”.
That means doing so with no deck, no data room, no legal entities formed, just the thesis and a coffee, and the PACTs are the way to track the traction.
After a few PACTs, i.e. after knowing a few people are keen, VCs can then start working on the deck, the data room, and then the allocation, returns and liquidity projections.
Then what?
It’ll typically take a handful of PACTs to get to a FCD so those LPs that have signed up will likely get added to an email list to be kept up to date while the VC goes hunting for more.
There’s no point inundating LPs with too much information but those emails are a great way to share the more confidential and candid stuff as well as portfolio news, investment targets and any requests for help.
Then it’s really about getting a ‘closing schedule’ running, which means getting enough PACTs to call a FCD, send the full Limited Partner Agreement (LPA) to the LPs and (crucially!) ask them to wire the money. This is when the first ‘capital call’ happens and is typically 25% of whatever the LP committed (so LPs don’t wire the VC all their commitment all at once2).
From here investments can be made and it’s likely that the targets are known, so the manager can get cracking on due diligence, making an offer, and negotiating and signing investment agreements.
That’s quite a process eh?
And then what?!
Well, there’s still fundraising to be done. Getting past the FCD means the manager can get investing but more money can be added to the fund so there may be a ‘Second Close Date’ (unlikely for small funds though) then a ‘Final Close Date’ when the first 25% of all remaining commitments are wired.
Some funds over-fund. For example a manager might go out and say they want to raise a $5m fund, knowing they can get going with a first close of, say, $3m but then after the first close people are still committing well beyond the $5m. Result! There may be a ‘hard cap’ of, say $8m so over-funding a bit is fine — the more the merrier.
After that it’s the other stuff that the manager (hopefully!) really wants to do and is good at too — investing in amazing startups, helping the portfolio and updating LPs.
Then, before too long, it’ll the time to start thinking about Fund II…
Venture bull run?
Timing is everything, but quite possibly...
Investors make money by investing at the beginning of the bull run and taking it out at the end so if people are fearful then perhaps it’s the time to be greedy3.
In a recent post Adeo wrote that waiting could cost investors the next bull cycle. Here's what he thinks about why new managers are activating right now:
LPs are actively seeking new managers — small, nimble, ‘lite’ funds are outperforming more established ones and LPs are beginning to realise.
Valuations are low, creating incredible opportunities — a lot of founders were ‘swimming naked4’ and they don’t think the tide is going out.
Economic indicators point to the next venture bull cycle — the last one started in 2008-ish when people were quitting, getting fired and doom-mongering. Remember what followed?
Policy makers are championing the startup ecosystem — ‘DC gets VC’ and I think that’ll happen in the UK too5. Regulations will get re-written with input from VCs and they’ll be founder-friendly.
Venture capital’s impact is undeniable — just check out the research that Ilya A. Strebulaev from Stanford shares in the Venture Trailblazers video below.
You can also read the full the post on LinkedIn here.
People are building
As I wrote about here in July 2022 things do occasionally get tough, but that doesn’t stop some people. You can read about Airbnb, BitCoin and Uber in that post, but I wonder who won’t be stopped by the challenges happening now and coming in 2025, 2026 and beyond.
Naturally, timing is everything.
But the tide is low.
The builders are building.
In other (portfolio co) news
🎧 Vivi, founder of Black Bullion, was on the Making Money podcast talking policy, uni fees, building a network and more. You can listen and watch it here.
🌎 Chris, co-founder of what3words, will be at CES in January. Go find the team at ///shapes.tree.dreams in the West Hall!
🤖 If you haven’t already seen it, each week Priya, founder of CENTURY, shares the most interesting things she sees happening in AI. You can see the latest here.
🎅🏻 And you can get some Christmas stocking-fillers here, here, here, here, here and here!
More from me?
If you like my writing you can get more by buying my book, ‘Find your 9others’. It’s on Amazon here.
And if you’ve already read ‘Find your 9others’ please leave an Amazon review here.
Q&A
🆓 Free subscribers get a short preview and all free public posts. NB: All posts in 2024 will have paid-subscriber-only parts.
💰 Paid subscribers get access to all posts, the angel investor Q&A podcast I did during the 2020 lockdowns, the full archive and can request a video call to ask me anything and talk about the things I don’t share anywhere else.
💰💰💰 Founding Members get all paid benefits plus you get to WhatsApp me unlimited questions for discussion, you get a one hour discussion session once a quarter plus a great lunch in London, on me.
Important: None of these posts are investment advice. If you are thinking about investing you should seek the advice of a suitably qualified independent advisor.
#CapitalAtRisk
Limited Partners, or LPs, are the people of entities that invest in VC funds.
This is because the startups that the VC will invest in later in the fund lifecycle probably aren’t even ideas yet.
From Warren Buffett’s letter, 1986, when he wrote, “Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.
Another Warren Buffett quote, “Only when the tide goes out do you learn who has been swimming naked”.
I was asked on a call yesterday how things were looking in the UK. I said that when life is hard it’s actually easier to see the people who are going to dig deep and have the grit to crack on Vs the ones that just haven’t got it.