Guides · Fund formation and first-time fund managers

How to Launch Your First Fund

Most first-time managers aim too big. I hear about 200 million and 500 million dollar first funds from people who have never raised capital before. Most of those funds never close.

This guide covers how I think about a first fund. It draws on what I have said in my videos and what managers have shared with us at Family Office Club. Many managers talk to a securities attorney about their structure before they act.

How it works, in order

Step 1. Start with a small first fund

I see first-time managers announce a 200 million or 500 million dollar first fund. Unless you have a crazy background category, like the one Steve Schwarzman had when he started Blackstone, that is not happening. I would start with a five or ten million dollar fund. Some people do come out of the gates and close 250 million, and that is a strong result. Most people can't, and most fail. Michael Jordan was one of the best athletes ever and still could not go straight from pro basketball into pro baseball. Do not make your life harder than it needs to be.

Step 2. Plan your next fund size

Map out your next fund before you launch the first one. A five or ten million dollar fund can lead to a 20 or 30 million dollar fund, then a 50 to 70 million dollar fund, and up from there. People would rather invest with you on fund four, raising 200 million, than watch fund one stay open for five years trying to raise 200 million. People like to see momentum. They would rather see you fill a smaller fund, then another, and see how the different vintages performed over time.

Step 3. Use one-off deals to build trust

The people who go into a first fund are often past one-off investors who now trust you. Some managers let investors do up to two or three one-off deals. By the fourth deal, the investor has to decide whether they really trust the manager and come into the fund. Others say that investors putting in more than a quarter million or a half million can pick some one-off deals, because they are bigger investors and the extra hassle is worth it. Pick a rule that fits your investors and write it down.

Step 4. Set rules for fund versus side deals

One manager on a webinar said they wanted to avoid any direct competition between the fund and a side deal. I agree with keeping that line clear. Some managers keep deals on the side separate from the fund, and others limit how much of a deal an individual takes while the rest goes through the fund. You can make up your own rules that help you. Many managers talk to a securities attorney about how to set them up.

Step 5. Keep direct and co-investment options

Some communities beat the create-a-fund drum so hard that it hurts people's progress. I know people who manage 500 million dollars and cannot get a 10 million dollar fund off the ground. I know others who launched and grew to 100 million quickly. A lot of family offices like to go into real deals directly. So if you start a fund, also do direct investments or allow co-investments. The fund is not the holy grail. You might lose some of your biggest investors by being rigid.

Step 6. Educate investors before you close

One manager told us they incubated their fund for a year and a half. They wrote into their docs that they would go to a fund. But that did not mean they walked people through the process and educated them while they were getting educated themselves. They found a communication gap they still had to bridge. Explain what a fund is, how it differs from one-off deals and why you are moving to one. Do it early and do it more than once.

Step 7. Know who invests in funds

Think about who your investors will be. Some family offices want a manager to reach 30 or 50 million dollars in assets, sometimes 100 million plus, before they invest as a normal LP. There are 20,000 family offices or more globally, so risk preferences vary a lot. Endowments and pension funds often decide by committee, and an investment consultant may advise them or decide for them. A fund of funds spreads money across several funds. Learn how each group decides before you pitch them.

Step 8. Look professional and vet partners

Small things count. Use a professional email address. Have a professional pitch deck or one pager. Keep your structure simple enough that investors can understand it. Avoid bad partners and the wrong niche, because those mistakes come up over and over. Pay attention to the three trust curves. Work with people who already trust you, know your industry, or can visit the asset locally. Many managers talk to a securities attorney about their entity and fund type before they go further.

From my talks

More from my talks

Direct investors are a real part of your audience, so do not ignore them. A decent percentage of investors will not even look at a fund because they prefer direct deals. I have also seen people with 500 million dollars under management who did all direct deals launch a fund and fail to raise even 10 million. Paul talked about providing 100 million dollars of equity to a new manager over time. He got to know them, stayed in touch, and a couple of years later helped seed their fund and then invested in each next fund.

Mistakes to avoid

• Trying to raise 200 million or 500 million for a first fund without a standout background.
• Leaving fund one open for years instead of closing a smaller fund and moving to the next one.
• Refusing direct deals or co-investments because you think the fund is the only way to work.
• Letting side deals compete with the fund because you never set clear rules.
• Moving investors into a fund without explaining the change to them first.

From the source

• There are 20,000 family offices or more globally, with a full spectrum of risk preferences.
• Some family offices want a manager to reach 30 to 50 million dollars in assets, sometimes 100 million plus, before investing as a normal LP.
• One manager incubated their fund for a year and a half and wrote the move to a fund into their docs.

General education only. Not legal, tax or investment advice.

Talk to a securities attorney to explore options around fund structure, side deal rules and offering documents. Do not use AI to write your own legal agreements.

Questions about this guide

Related questions

• Do I need a fund administrator for a small fund?Often not on day one, but plan on it early.
• How do I launch a venture fund with no track record?You start by borrowing credibility, because you cannot create a track record overnight.
• How do I write a fund term sheet for LPs?Write the term sheet as a short, plain summary of the economics and rules of your fund.
• How long does fund formation take from start to launch?There is no single number, because fund formation runs on two clocks.

Use the how much to raise calculator alongside this guide.