Capital raising topics

Fund formation and first-time fund managers

A first close often rests on one or two committed investors, not a crowd, according to Richard C. Wilson. So the first question for a new manager is who that investor is and whether the structure lets them say yes. The biggest challenge for first-time managers is earning trust before there is a track record. Richard suggests borrowing credibility by bringing in partners who have one, and keeping direct deals and co-investments open.

Pages here cover the pieces of setting up a fund. Topics include the Delaware limited partnership, the limited partnership agreement, and why the management company is kept separate from the fund. It also covers fees and carry, where many managers now charge closer to 1.5 or 1.25 and 20, plus placement agents, SPVs and rolling funds. Richard is not an attorney, so each page points readers to securities counsel. The guide How to Launch Your First Fund is a good place to start.

1 video, 22 questions and 1 guide on this topic.

Guides

• How to Launch Your First FundMost first-time managers aim too big.

Videos with summaries and takeaways

• Capital Raising Mistakes to Avoid: Richard C. Wilson, Ep 16Starting a first fund at 5 or 10 million dollars, then stepping up to 20 or 30 million and later 50 to 70 million, is the core advice in module 16 of the 100 Million Dollar Rainmakers series.

Questions answered

• How much should a GP commit to their own fund?There is no single number that fits every fund.
• What is the biggest challenge for first-time fund managers raising capital?The biggest challenge is earning trust before you have a track record.
• 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 much capital do I need for a first close?There is no single number.
• How much does it cost to set up a private fund?It depends on the structure, the number of investors and the law firm, so I won't give you one number.
• How do I choose an auditor for my fund?Choose an auditor that already audits funds like yours, is independent from your team and your administrator, and can finish on a timeline your investors accept.
• What is the difference between a first close and a final close?The first close is the date your fund accepts its first group of investors and can start operating.
• Do I need a fund administrator for a small fund?Often not on day one, but plan on it early.
• What are clawback provisions in fund agreements?A clawback provision in a fund agreement is generally meant to bring back money that was already paid out, under conditions the agreement sets.
• How long does fund formation take from start to launch?There is no single number, because fund formation runs on two clocks.
• What is a fund of one and who uses it?A fund of one is a private fund set up for a single investor, usually a large family office or institution that wants its own terms.
• Why should the management company be separate from the fund?The two do different jobs, so many managers think about keeping them in different entities.
• What management fee and carry should a new fund charge?There is no single right number.
• What does a placement agent do and what do they charge?A placement agent introduces your fund or deal to investors and manages part of the raise.
• What is a side car fund and when is it used?A side car fund is a separate vehicle that invests next to a main fund, usually in a single deal.
• What is an SPV and when should I use one?An SPV, or special purpose vehicle, is a separate entity formed to hold one investment, with investors pooled into it.
• How do I start my first private equity fund?Start by learning who will fund it.
• How do I form a Delaware limited partnership for a fund?Many sponsors work with an attorney on the state filings and a limited partnership agreement.
• How do hurdle rates and catch-up work in a fund?A hurdle rate is the minimum return investors receive before the manager shares in profits.
• How do I launch a hedge fund with small starting capital?Start small and raise from the people who already know you.
• What is a rolling fund and how does it work?A rolling fund is a structure where investors subscribe in recurring periods, usually each quarter, instead of everyone committing at one final close.
• 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 do I close a funding round?I close a funding round by focusing on investors who fit the opportunity and moving each interested prospect through clear, consistent follow-up.
• What documents do investors request during due diligence?Prepare a clear, organized package covering your operations, investments, compensation, team, and track record.
• How do I raise capital for my business?I raise capital by building a repeatable system for attracting the right investors, establishing credibility, and developing relationships before asking for money.
• How do I raise money with no track record?I would raise money without a track record by focusing on credibility, relationships, and evidence of my ability to execute.

Tools for this topic

• Ready to raise checklist

Common questions