PRINT THIS PAGE Oh, no! Not fund raising again?14/03/2007. Source: Israel Venture Capital Journal (IVCJ). Jonathan Saacks, Genesis Partners 
In this IVCJ article, Jonathan Saacks of Genesis Partners offers some alternative best practices that could increase the rate of fund raising success, while making the process more enjoyable or, at least, less painful. "A shortcut is the longest distance between two points" – Issawi: The Path of Progress. Raising money for a new venture capital fund is not an easy thing. Fund raising is a humbling experience and a great opportunity for self-examination. The process involves identifying and reaching potential investors, holding numerous meetings and preparing a tremendous quantity of material to satisfy the thorough due diligence requirements of potential investors.
VCs are analyzed from every possible angle and compete for investor money with other VC funds throughout the world. Consequently, no venture capital investor will tell you that he or she prefers fund raising to investing in companies. But fund raising is a critical part of any venture capitalist’s job, and determines the sustainability and success of the firm. As such, the typical VC aims to minimize the ‘pain’ of fund raising and hopes the process will be as short as possible.
There is one thing that general partners (GPs) and limited partners (LPs) definitely agree upon — that venture capital is a long term play. It takes time to exit companies. It takes time to generate returns. As in other areas, it absolutely takes time for a VC to build strong relationships with entrepreneurs and investors. So why do we believe fund raising could be a short process that we start thinking of ‘just-in-time’?
The venture capital asset class is unique. LP commitments are long term and illiquid – at least initially – and the investments are high risk. Limited partners or investors, as in other asset classes, face the task of choosing the best manager. But, in venture capital, choosing the best manager is more difficult because of the scarcity of proven top quartile funds and the uncertainty of returns from current fund investments. Investors in venture capital today are much more experienced and familiar with the asset class than in previous years, and therefore are very thorough, meticulous and selective in their investments.
In general, the parameters they evaluate can be categorized into four main areas:
• track record and performance
• strategy and operations
• team
• competitive position and differentiation
The extent to which the attributes of a VC fund in these four areas match the preferences of potential investors has a significant impact on the ability of the VC to raise funds.
None of this is rocket science. The problem, however, is that a majority of funds tend to start thinking of these things, and in these terms, only a short while before embarking on the fund raising process. Furthermore, some VCs tend to be unrealistically optimistic that their fund raising will be short and successful.
Prudent VCs will define a period they call "pre-marketing" to test the waters, get reacquainted with potential investors and engage in brainstorming sessions in order to reevaluate the fund strategy, performance and team structure. This will usually begin several months before active fund raising begins and – depending on feedback – will determine the start of the actual fund raising. While pre-marketing is a valuable tool, I strongly believe that there are additional approaches to fund raising.
Investment professionals need to continuously work at cultivating and maintaining good relationships with entrepreneurs in order to ensure strong deal flow. The same holds true for relations with LPs. VCs need to make sure they maintain ongoing relations with LPs so that they do not need to get reacquainted only when fund raising time arrives. LPs should feel comfortable enough with the people, processes and strategies involved to shorten their investment decision process.
Fund raising as a continuous priority
Venture capital is not for those interested in a short term experience. With this in mind, the four criteria listed above take on new meaning for funds with long term success in mind. It is not enough to wake up one day, conduct a self-evaluation, decide on a strategy for a new fund and see if personnel changes need to be made. Instead, funds should be continuously thinking of these issues and operating in a way that is in line with their strategy, because potential investors are continuously looking, listening and inquiring about the market and deals. In addition, when potential investors perform their due diligence on a venture fund, they look at historical data, talk to people in the market and compare what was said with what was done, how it was done, and how others perceive what was done. Therefore, it is difficult to cut corners, and it is unwise to try and position the fund as something it is not because history and the market will say differently. These are some of the things VCs should continuously be thinking of to determine how to best operate under constant fund raising mode with long term success in mind:
1. Track record and performance. A certain portion of a VC portfolio is unrealized at the time of active fund raising and must be marketed on its potential value. But given the lack of industry standards in private company valuation, do we have a firm valuation policy in place? Have we continuously adhered to this policy? Can we show that we have continuously and reliably valued the companies as conservatively as we claim now?
2. Team. Do we really know what the market thinks of our team? Not the opinions of our portfolio CEOs, but those of the entrepreneurs that we rejected and that received funding elsewhere. Is there a well balanced team in place and a plan for the succession of current managing partners or should new hirings take place to strengthen the team?
3. Strategy and operations. What strategy was presented in the last private placement memorandum (PPM)? Did the fund operate in a consistent manner and was it rewarded for it? Is the strategy now being implemented and presented in this vintage’s PPM different from the previous one? Can it be proven that this is the right strategy given the fund’s past performance, the current market and the existing team?
4. Competitive position. Why should an investor give money to this management team and not to one of the other groups in the market? Why is this fund different, and does the market perceive this positioning as the managers intended? Has this position been consistent and has the fund built its reputation through previous year’s operations and activities in the market over the last funds? These are the type of questions investors will be asking during due diligence and therefore the types of questions that VCs should be asking themselves before they begin active fund raising.
Funds continuously need to be thinking of whom they are, what they are, how they operate and how they can achieve the results to which they aspire. The best way to do this is to be prepared for active fund raising at all times by thinking as if we are fund raising…always. What this requires operationally, among other things, is to maintain up-to-date fund material, constantly monitor and analyze portfolio data, evaluate and measure fund performance, and ensure that managers know what is happening in the market and are operating according to stated strategy and desired positioning. And, of course, the most important element in creating an infrastructure that will eventually result in more successful fund raising is to maintain ongoing close relationships with investors and entrepreneurs – listening to their needs and learning from their input.
This article appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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