On Starting a Venture Capital Fund

There's an incredible amount of transparency in the startup world. There's very little in the world of venture capital.

General lack of incentive is likely a big part of that, but more critically, it's counter-culture to what most VCs need to represent: an all-knowing aura. It's good for business.

Well, that's not me. And I certainly don't consider myself a VC.

I take pride in starting, doing and sharing what I learn. The pace and depth of learning here has been impressive and I don't want to temper that. I want to provide a very real collection of thoughts and opinions on the topic of starting a small fund and venture capital as a whole.

The What

Here's the backgound. I've been a startup builder and operator since I was a teenager. That identity has been core to me from the start, leading me down a path that has consumed my entire adult career to this point. Working from nothing to hundreds of employees and millions in revenue. Successes and failures, most of which I've painstakingly documented.

Because of that, like most folks that have spent a large chunk of time in startups, I've always been fascinated with the idea of being a venture capitalist. You know, that magical job of hanging out with entreprenuers all day. Seeing the other side of the table. Helping dozens of companies at the earliest stages.

And I saw a gap that needed to be filled with something different. The result was Curious Capital.

Being led by that curiosity (ahem), I wanted to see the process of starting and running a fund first-hand. There's simpler ways to get this education and experience, of course. Namely, joining an existing firm. This obviously isn't that way.

The Why

First question: Why did I decide to do this?

To answer this, I'll rewind just over 18 months. I had been happily working as the CMO at Bitly in New York City. Then I got a call. My mom had been diagnosed with late stage ovarian cancer that had spread to surrounding organs. The 5 year survival rate of her cancer and stage is extremely low, less than 10 percent. I began flying back home to the Seattle area (where I grew up and my parents live) every few weeks to be there with her. Through surgery. Through chemo. Through the hell that is a cancer diagnosis. After several months of this, it became clear that it was selfish and unsustainable for me to stay in New York as my mom battled.

I moved back home to Seattle and transitioned out of my role. That was early 2017.

As I began thinking about my next move, impact and helping as many people as possible was priority number one, for the first-time ever. Not money, not status. Impact. Seeing my mom literally fight for her life each day drastically changed the way I thought about prioritizing my career.

When I lived in Seattle previously, my biggest gripe as an entrepreneur was the lack of capital investing in startups, but more importantly, energetic support from startup builders, at the very early stage of starting a company. After experiencing the ecosystem in the Bay Area and New York first-hand, this was painfully obvious. If you know any entrepreneurs in Seattle, you'll hear this frequently. I'll devote a different post to dissecting just why (I believe) that is.

Very simply, I wanted to help solve this problem.

This led me to starting Curious. Optimistically, I knew it would be challenging to start a first-time fund, but possible.

My distilled thesis that I "went to market with" was this: The Pacific Northwest technology ecosystem, and Seattle specifically, is severely underserved at day zero of starting a company.

This will become more obvious over-time as more folks leave the Bay Area for greener pastures. So I set out to raise a small proof of concept fund to validate that thesis.

Raising The Fund

I've raised money before. Raising for a fund was different. Completely abstract, no product to show, no user metrics to point to. No real forcing-function for an investor to participate in the first fund. It's just you (and my partner Cameron at the time, who later moved onto Ignition). When we went out to raise, we were targeting a $10M fund. For a VC fund, this is small. For a first-time fund with a geographic thesis, it's aggressive.

We failed at reaching this target for a few reasons:

  • Me.
  • Confidence. I wasn't 100% confident in the market for our thesis today, seed stage venture capital as an asset class, and my desire to be a venture capitalist long-term.
  • Thesis. The local thesis narrowed down the potential LP (limited partner) base significantly. Not many investors outside of Seattle care about Seattle or the PNW tech ecosystem (yet). There were also several other funds raising at the time with this same thesis, which limited that LP base even further.
  • No investing track record. Operating track record was important, but an investment track record, either at a large fund or as an angel, was a requirement for nearly every large LP.
  • Stamina. If you've ever fundraised, there's few things more emotionally taxing. Especially when you're not working with user metrics or product to point to. After about 4 months, I ran out of steam.

The most frequent no I heard was a "come back to me on fund II." This made it very obvious that I could continue to slog or go prove it.

I decided to close what I had and go prove it.

(This isn't top of mind for most entreprenuers, but most of the VCs you're pitching are constantly trying to raise money as well.)

The Economics of a VC Fund

The economics of venture are well documented. But until you see it first-hand, it doesn't quite sink in.

It took me doing it to really understand this fact: Venture capital is a fees business, not a returns business. Meaning, most venture capital funds raise as much money as possible, stack funds, and live off the fees. That's the only way to make money. At least in the short-term.

That's mainly due to the timeline. Most seed-stage investments work on a 6-10 year timeline. Because of that, the only way the GPs (General Partners) on the fund are compensated is via the management fee, which is generally around 2% annually. You can do the math for various fund sizes.

This means that the ability to be successful in the short term relies purely on your ability to raise capital, not on being a great investor -- and you don't find that out until many years down the road. By starting a fund, you're effectively singing up for a never-ending process of raising money.

Also, it's assumed that if you work as an investor, you make a lot of money. If you're an investor in a large fund, you likely do. At a small first-fund, it's zero. I set up my management fee so that it only covers the basic fund setup. I don't take a management fee and I don't get paid unless the investments do well.

As I've learned, this is true of most small funds that are under $10M in size.

This creates a challenging dynamic, as you can imagine. Unless you're very wealthy, you have to find a way to pay the bills. This causes many small fund managers to take on consulting clients as well to make ends meet, or raise money furiously until the management fees become meaningful enough.

What I Would Do Differently

So, why did I sign up for this? It's a fair question. I've been very fortunate to have options to continue down the CMO or CEO path. I decided not to pursue those. Here's why.

I believe strongly in conscious decisions that force uncomfortable situations and accelerate learning. I've never been one for the path of least resistance.

Let's talk about what I would do differently to ease some of that and what I'd recommend to you if you want to start your own venture capital fund.

  • Angel invest first. Investing track record is important, as is validating your passion for it. Set aside some portion of money you're willing to lose and play the part, it'll tell you a lot.
  • Leverage the tools at hand. Running your fund via AngelList or as a syndicate alleviates a huge portion of the upstart costs of a fund, which are still quite high. It's the most efficient way to start building a name for yourself as an investor.
  • Lose the local thesis. Supporting your local ecosystem is an amazing thing. It can also be very limiting. In hindsight, I would've had more success (and fun) raising on a vertical or market-based thesis.
  • Continue raising. If you do decide to raise a formal fund, be prepared to fundraise for longer. It takes nearly as much time and energy to manage a small fund as it does a large fund and your ability to have a positive impact improves. With a small fund, you can't lead rounds and invest in the founders that aren't receiving support elsewhere.
  • Surround yourself with people. Starting and running a fund is extremely lonely, especially when that fund is small. This proved to be the most taxing challenge for me personally.

The Venture Capital Industry

The core of venture capital is sound and honorable: apply capital (that will likely be spent elsewhere) to early-stage startups that have the potential to impact the world.

This mission statement created a pass for a lot of what actually goes on and just how inefficient it is. There is an incredible amount of bullshit and posturing in venture capital. In fact, that is a core requirement of the job.

An unhealthy amount of time is spent by entreprenuers chasing VCs to invest in them. VCs often lobby for growth at all costs, creating unsustainable companies with toxic cultures. And the dynamic of venture has one that is driven by relationships and warm intros, not merit, causing a large disparity in equality across funded founders. This is how the industry has been designed and it feels incredibly broken. The reality is that venture capitalists are the ones holding the checkbooks. This creates the come pitch me dynamic.

There needs to be a more efficient method for fundraising that's driven by merit. CaaS is an example of what's possible.

Not every company should raise venture capital and the tech industry should have a viable vehicle to support revenue-producing "lifestyle businesses". Indie.vc is an example of what's possible there.

And there needs to be more diverse fund managers. Female Founders Fund is a strong step there.

What's Next?

I'm not sure yet. Priority number one for me is being a good steward of the money that was raised while continuing to support our portfolio companies. I believe very passionately in finishing what I start.

There's a chance I may pursue Curious V2 that helps address some of the issues above more directly. There's a chance I may go back to operating. You only get to tackle so many challenges in a lifetime. The key question for me today is whether the problem I'm trying to solve is worth solving. As I got deeper into the fund and the challenges in the PNW, the answer to that question was no.

One thing is clear, though. As a an operator and now investor, I miss building.

A note of thanks to everyone that supported us, from our LPs to co-investors, and to the incredible founders that let us join in on the ride. For a different perspective on this topic, Elizabeth Yin of Hustle Fund wrote up something similar.

Hi there, I'm Andrew. Welcome to my blog. I'm an entrepreneur that loves the process of building and scaling startup companies.

This is where I share my journey and lessons learned, feel free to follow along. Read more →

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