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Jon Bradshaw & Peter Harris

Have you ever wanted to start a fund? Peter and Jon talk about their experiences and tips for you.

Tips for First-Time Fund Managers

Do you want to know how to start your own fund? In this episode, Peter and Jon talk about their own experiences as first-time fund managers.

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Episode Transcript

Jon: Welcome to the podcast. Find us on Apple. Venture Capital is the title and we are doing really well on downloads beta. So thank everyone for watching. We're well on the way to 50,000 downloads and for the first year the podcast. Most most podcasts don't get this much traction, and most of our days are between 100 to 200 downloads plus.
Jon: So thank everyone for making that happen.
Peter: Yes, thank you. It's all because of your great you're great voice. They just love hearing.
Jon: It migrate know most of the time they tell me to shut up on YouTube and then I like to spar with them. Tell the guy in the left to shut up and they'll comment on you on YouTube. I'm the guy on the left, by the way. I fully recognize Peter. Peter's the brain here. Peter is the brain here.
Jon: He's the VC backed background and he's your new I'm the I've got the founder stories and and whatnot. And together I think we make a great pair. So indeed, does your wife call me your your business? Your what is it we have we advanced to the stage where I'm your your other wife. No, no, Hard. No. Maybe we need to talk talk more as we prepare.
Jon: Like some of the people I've worked with in the.
Peter: Past is very jealous about how much time I spend with you doing these podcast.
Jon: I could see that. I mean, the IRA I get. I get excited every time.
Peter: What are we talking about tonight?
Jon: So let's talk about tips for first time fund managers or how would you start your first fund? I feel like right now it maybe just where the the stage of life are. People are like, I'm going to start a VC fund. I'm going to buy a private plane. I feel like this year in my life that.
Peter: Those are like the choices sort of driven by a place.
Jon: And I think both these guys are like posturing.
Peter: Yeah, I don't.
Jon: Know how serious they are, but it's fair, it's fairly common. And so and you know, and I'm 39 now. I think you're roughly the same age. Yeah. So maybe at that spot, I mean, how come you even bought a plane yet?
Peter: That is a great question because it's because I bought a venture fund instead.
Jon: You bought a venture fund? Yes. And as a founder of a venture fund, it's really expensive.
Peter: It is a little expensive a long time.
Jon: I don't think most people realize that. How what's the general role of a first time fund? How much capital do most individuals have to contribute to get off the ground? 2%.
Peter: 10% has a good question. I mean, look, most funds, general partners and the funds are are at least to like 1 to 2% of the total assets in.
Jon: All of them combined or individual.
Peter: Net list. Yeah, it depends like like if you've made a ton of money, then your LPs are going to expect you to have a meaningful amount of your net worth tied up in the fund to ensure that there is good alignment right between their interests and yours. If you haven't made a ton of money, then you know they still, whatever that number is, it still needs to be meaningful to demonstrate you have skin in the game.
Jon: What I was looking at so vs bring. It's a fund that no longer exists. Yeah, it's been acquired its assets twice now. Maybe once or twice. But the the the found the partners they're my understanding was they had at least put enough capital to cover their salary for the next two or three years. So they would still get a salary but they'd put in at least let's say they're making two hour K they're expected to put in almost like 600 K, which was would be paid back to them as a salary to that.
Peter: It could be, I mean to set up a fund your probably your your legal docs are probably your biggest expense out of the gate that's you know anywhere between 50 and $200,000. So the cleaner it is, the less negotiation you have to do, the more template driven it could be. You're closer to 50 K, the more unique specialized negotiation side letters, you know, all that stuff, the closer you are to that 200 number.
Peter: So, you know, that's that's a big chunk of change. And then you add on top of that like, yeah, you're not taking a salary while you're fundraising and you can't really do it on the side while you're doing another job. You really need to be kind of all in. It's also all those things make it challenging, right? It's also.
Jon: Starting to find is also it's almost like two jobs because you're the fund manager and then you have to be looking for like investments and things at the same.
Peter: Time. You're like a business owner and you're you're a fund manager. Yeah, that's one of the things that I remind people all the time about, which is like when you talk to VCs, it's really easy to be like, these are arrogant and like, they don't really appreciate and can't really empathize with, like what I'm going through as a founder.
Peter: But like, you know, a lot of you see these especially small ones, single GP or it's just a couple of GP's like they're entrepreneurs too. They're just running a totally different business than you are and they, they face similar issues around like I got to go fundraise, I got to come up with a differentiated strategy, I've got to fight for deal flow, you know, instead of customers.
Peter: I've got to I've got to hire people and manage people and set up payroll and like all these other things, right? Except for they're going to do it on a model that is like not very scalable, frankly. and you know, is kind of this like cottage industry kind of thing where it's like, yeah, you're a team of like ten people and you got to man it, you know, it doesn't matter how much money you're managing.
Peter: Like you still have to manage all these things, right? Then payroll and you know, people and office space and travel and so forth. So don't get me wrong, like I love being a VC and doing what I do, but like, it's not it's not always as sexy and glamorous under the hood.
Jon: And I think and as a startup, you have fairly large binary events. Yeah, I mean, like, like look at code base. Code base. You know, you get a client, you lose a client, a client may increase in size down, you know, decrease. Yeah, but it's very rare that like one thing that would happen that could put me under.
Jon: Yeah. Where I think in the, in the VC space you've got multiple critical events, you know, can you even raise a fund. Yeah. And then maybe we talk about as we're talking about operational challenges, Derek Hall, a good friend. He's been a VC both in San Francisco and in Brazil, and, you know, he said something when he was here in Utah this last last month that I thought was interesting is as hard as it is to raise a fund, he says it's much harder deploying capital in the right companies because everyone wants to be in those companies.
Jon: Yeah, and the valuations are crazy high and founders have crazy, right? As we were just talked about in our last episode with FDX and FTT. Yeah. Where there's, you know, very little oversight for even even funds like Sequoia. And it's like, how do you compete as a see when someone like Sequoia can drop 200 million into a startup.
Jon: Yeah and you know, you're lucky as a first time VC to drop a 1 to $2 million check.
Peter: Yeah. Yeah. No, it's. It's challenging, right? And what I tell my students all the time is in order. I feel like in order to be a world class VC, you have to be world class at at least two of three things. I think we've talked about this before. You have to be able to fundraise. You have to be able to source deals and you have to be able to pick the right deals because sometimes the deals that are the most sexy and everyone's throwing money at are horrible deals, right?
Peter: And you don't want to be in them, but sometimes they are the deal. You really want to be in, right? And being able to know the difference, that's important.
Jon: How do you.
Peter: Being able to get access to that really hot deal to begin with that's important. And then being able to convince investors to come in. And what I've seen over the years working with, you know, hundreds, if not thousands of theses is like the ones that are like at the top of their game are world class at two of those three things.
Peter: If you can be world class at two of those three things, you can be a good investor. You don't have to be good at all three. But being world class is just one of them. It's hard, right, let alone two. And so to Derrick's point, right, he's like, Yeah, fundraising hard, I would argue. And Derek's probably pretty good on the fundraising side.
Peter: But to his point, like, Yeah, but then you got to get access to the good deals and that's hard.
Jon: And now you see VCs, not only they just the writing a check, they're trying to find a creative angle for you to say, Yes, you're different, let me come in. So I think University Growth Fund has the student angle. Yep. You know, Derek's angle when he was in San Francisco was We can help you open Latin America as part of the reason for letting us in.
Jon: Yeah.
Peter: Yeah. I think honestly, like, as a VC, see, especially of your first time, like, you got to figure out, like, what's your age? Just like any entrepreneur that's starting a business, like, you have to find your edge. What makes you special, what makes you competitive? And, you know, I think it used to be that your edge was all we have money, right?
Peter: Like, it's really hard to raise money for venture capital. We have the money. That's our edge, right? I don't think that plays anymore because capital is so vulnerable and so available today that it's it's not that hard to raise money, at least at least it hasn't been this year. Maybe a little bit different next year, maybe even worse.
Peter: I mean, we'll see. But like historically and so.
Jon: Like Andreessen, Horowitz has a whole team of sales reps that help their startups.
Peter: Yeah. Yeah. And so you got to find like, that's their angel, right? They're like, we're going to hire like 10,000 people and throw them at your startups to help. Like, but like you can win against. ANDRESEN Right. It is possible. ANDRESEN Andreessen wasn't even in FDX.
Jon: Yet, but we're just talking about operational challenges right now.
Peter: So, yeah, I mean, look, I think.
Jon: That's like finding your unique edge.
Peter: Yeah, it's finding your unique edge. Yeah. You could go early and have conviction when no one else has conviction. You can find some sort of edge like. Like us or Derrick, like you just mentioned. Or maybe you just go in. You work for one of the top tier brands, and those brands end up being an edge, right? Or maybe you're really you have deep sector expertise that gives you insight into who's going to be the winner before anybody else knows it.
Peter: And you can you can play with that conviction. So, yeah, I don't know. But I think that the day of like a bunch of white dudes in a, you know, fund in the middle of the U.S., I think those days are like coming to an end. I think it's going to be really hard for them to generate meaningful alpha going forward.
Jon: Because what alpha is for those who don't know.
Peter: So without going into like all the economic jargon.
Jon: He did drop a pretty big B.S. term there.
Peter: It's not really a VC term. It's more like maybe a high finance term. But anyways, the idea of an alpha is if you look at the like, you know, Black-Scholes model, blah, blah, blah, there's this idea of like there there's like general returns that everybody gets and then there's like outsized returns. And the difference between like the general returns everybody gets and that outsized return, that difference is alpha.
Peter: So it's this idea of like I can generate returns that are above the average, above the mean for this asset class. And if you're not generating alpha, you're not generating above the mean, it's going to be really, really hard to fundraise. Okay.
Jon: So yeah, what are their operational challenges that do someone should you expect to anticipate if you're applying to the launch fund?
Peter: Yeah. I mean, I think just operationally you should be aware that you're going to have to have a way to manage all of your portfolio companies and keep track of how they're doing and what's going on and how to be helpful to them. You're going to have to track all the accounting. You have to report to your peers.
Peter: You're probably going to have to have an audit from your from a firm, right? You're going to have people and you're gonna have to manage those people. I mean, it's just it's all of the same things that that companies have to deal with. you know, you're managing all of that plus trying to deploy capital.
Jon: Okay, let's talk about fund structure now of funds of the three friends I know who are actively launching a new fund. Yeah, two of them, which kind of blows my mind have chosen to go the fund often routes. Okay. Why do you think that is? And first.
Peter: Because it's easy.
Jon: Is that why? I mean, you you raise capital and then you're fighting to put money into support for those that you don't know instead of putting money in, you know, a certain startup. I'm trying to get money. A check into Sequoia. Yeah. Which I'm sure has a waiting list that's 100 years long.
Peter: Yeah. I mean, honestly, I don't think Sequoia has a waiting list. I think they just say no, right? Yeah. So if you're a fund of funds and you're trying to get into Sequoia, yeah, there's probably in your whole thesis is like we only exist if we can get into Sequoia. That's probably hard. But if you're a fund of funds and you're like, Hey, look, like I'm just going to go back a bunch of VCs.
Jon: And to me.
Peter: That's relatively easy.
Jon: Right? Maybe. But you're basically just a fund raiser for those VCs. Yeah, I think the other thing they're trying to do is they're trying to do a fund of funds, I think, on somewhat of a more of a localized level. Okay. And so it's like being a fund of funds for Utah VCs. Okay. Which I don't know, it's a new thought, but it's a new thought, at least in the Utah area, which I feel like is more prevalent than I would anticipate it being.
Jon: Yeah. So what fund structure would you go after? You're at launch a fund today?

Jon: You create a revenue base. You know, revenue is base financing. Fine. You could do another VC fund.
Peter: I probably do. I probably do something pretty similar to what I do today, which is we do we're very opportunistic. We do early growth late with an emphasis on early in growth. Okay. Kind of series eight or series C and a focus on.
Jon: Yeah.
Peter: But that's mostly just because that's what I've kind of built my career around and that's what I enjoy doing.
Jon: Okay.
Peter: I'll tell you what. Like if I had all the money in the world, I'd also set up a seed fund where I just write checks to absolutely insane, crazy ideas just for the fun of it. And, but I wouldn't raise money for that. I would just blow my own money the way I. The way I scratch that itch today is I back stuff on Kickstarter.
Peter: Okay, I think I've backed think Today marks 140 projects on Kickstarter.
Jon: I know I get a lot of little alerts. Peter just dropped some a coin. Really? That's funny. I think it's you and maybe someone else. But anyways, what would be your thesis or your your portfolio strategy? Is it just going for early or high growth?
Peter: Yeah, I mean I think there is a lot of.
Jon: Because I think you're fairly different strategy that a lot pursue. A lot of VC tend to have like a tighter focus like album local VC. I feel like they're looking for a SAS model that's ready for a sales team to be thrown on it. Yeah.
Peter: Yeah. Look, I don't know if I'd have to think about more like what what that exact strategy is. I'll tell you, our strategy today is twofold. One is find the like under of gems of companies that are growing really fast and doing it profitably. And the other is leverage, who we are to get into some of the hottest, most competitive deals that have tons of funding and backing.
Jon: And then you got into Spotify, into Lyft. So it's working well, Yeah, well, we'll see. We'll see. But you've already you're on your second funder, third fund, second fund. Second fund.
Peter: Well, yeah, the third fund that I've run.
Jon: Okay. Third fund. Yeah. How would you identify the right LPs for your fund?
Peter: whoever will give you money. Just kidding. Like, there's.
Jon: How many dentists I have to pitch then to raise a $20 million fund?
Peter: Your LP should align well with your investment strategy. That's my belief. So I was talking to I'm an LP and one of these angel list funds, and we were talking and I was like, You need to go after because part of their thing is like, we want to write the check that convinces you to leave your job, okay?
Peter: And I was like, Your LP base needs to be those people. The people that are still have that job that are making like somewhere between like 200 and $500,000 a year, like big high salary C-suite, VP level, like an about, you know, highly compensated people that are accredited investors. They can invest in the sort of thing they are the kinds of people that could spin out and launch a company that you would want to back.
Peter: Like those should be your LPs.
Jon: It just convoy, but.
Peter: Like they shouldn't be. My LP is for my fund. Okay. Yeah, right.
Jon: Is this convoy.
Peter: It may or may not be convoy.
Jon: Okay. Yeah.
Peter: but I mean, for us as a venture fund, like our LPs are large and financial institutions and so like part of our investments strategy is meeting like requirements and criteria that they have that are important to them, right?
Jon: I think when I was with the Utah Angels, I thought about launching what I called in my mind, the Utah Executive Fund. Yeah. Where you have a lot of these individuals who are six and seven figure earners who want to play like the VC card. Yeah. And I think even more importantly, have the knowledge to leverage. Yeah. So, for example, Chris, can you send good friend?
Jon: He was the founding CMO of Purple who launched them from nothing to over 100 million in revenue. Yep. And having a fund like that where you could ping him and say, Hey, part of the investment is the knowledge base. The other part is the cash. Yeah, you can get, you know, sit down. Someone like Chris, I think they'd be highly valuable.
Jon: I never heard of doing that. But when I was thinking about launching a fund, that was one of my ideas.
Peter: Yeah, that's not a unique idea. Like, a lot of a lot of funds have similar strategies. I think other ones that are interesting or, you know, here in Utah there's a fund called REIT Ventures that's real estate technology ventures and all of their LPs or most of their LPs are, you know, property owners and they own, you know, hundreds of thousands, if not millions of dollars of rental properties and other things.
Peter: And that gives them a huge ad rate because when you're trying to win that deal, right, and you go to them and you say, Hey, my LP is could be your first, you know, $10 million of revenue, right? People set up and they're like, maybe I'll take your money over Sequoia who can't offer that same advantage. Okay. Yeah.
Peter: so again, like, I think like, smart fund managers will find, like, ways to drive really good alignment between their LPs and their, their investment strategy. That would be like my biggest suggestion.
Jon: If you're trying to find a fund, would you approach family offices? yeah, for sure. But what about fund of funds? Sure. You're just gonna say yes?
Peter: Well, I mean, look at how you approach everybody, right? It's like.
Jon: Would I approach.
Peter: You a code base.
Jon: Or dentist? Would you go there?
Peter: maybe. Maybe not.
Jon: Okay. Yeah.
Peter: There does become a point where it's like you don't want to have, like a zillion people to writing small checks because they're like herding cats. And then the other thing that's really tough, and this is a trap that a lot of fund managers, especially like first time fund managers fall into. And there's there's no real easy way around this is they'll raise that.
Peter: So the typical path is right somebody makes enough money that or they have some angle that allows them to build a track record that is like the first thing you need is a track record, right? So they do a bunch of Angel deals, they generate these great returns, they bundle up those returns, and then they go to all their friends and family, like, Look how much money I made on my angel investments.
Peter: You should invest in my fund and I'll keep making investments like I did on the angel side and generate great returns. And so they get a bunch of their friends and families and fools all together, and they put up money and they raise, you know, like sub10 million or whatever it is. And then they deploy all the money and then they go back to their friends and family like, Hey, it's ready for fun, too.
Peter: You know, it's been three years and their friends and family are like, Yeah, we gave you all our money, you know, like, give it back and we'll give you some more. And they're like, That's not how this works. Like, this money's locked up probably for another ten years. and so then they're, they're in a tough spot and so fun too can be really challenging.
Jon: I heard that's where a lot of fund managers die as we.
Peter: Go to because they can't make that. They can't cross that CASA chasm.
Jon: So yeah, you deploy most your cash for the first three years, but then after you're three, you get your way another 5 to 8 years. So you know, years, 8 to 10. Yeah. So but by that point they've gotten another job. They're other things. Yeah. They're not known as a fund manager.
Peter: So this is why I, I think there are a lot, there's a lot of speculation that funds there'll be a lot of attrition of venture funds because when, when times are good you're able to show like strong write ups across your portfolio, even though it's a paper gains and you're able to raise the next fund on those paper gains.
Peter: So you're like, Hey, look, here's my angel investments, here's my paper gains on my my front one investments. Mr. Institution, please fund fund to write. But when times are not good, what happens is all these institutions start pulling back, right? They're conserving capital. It also what happens is like they have, you know, say you're a $10 billion asset manager, endowment, whatever.
Peter: most of your money is going to go into public stock and bonds. And in the current environment where you've just taken a 30 plus percent haircut on all of your equities, all of a sudden, like the allocation that you had, maybe you had a 10% of your total assets was allocated for alternative investments like venture. Well, if you went from a $10 billion corpus down to a $7 billion corpus, all of a sudden you had a 30% drop in the size of your available cash for alternative investments, and you're not going to put those most likely into risky first time funds.
Peter: You're going to put them into stable, you know, well-known funds that you've been backing this whole time. And you want to keep supporting because you want to keep being in their next fund and the next fund and the next one. And so it just makes it really hard. And so that's that's like some of the concern is that these fund managers that are in fund one, they've got like this portfolio, they've got mostly individuals that are backing them, Those individuals, they're also seeing their own like liquidity crises.
Peter: They're not going to be able to re-up and fund to institutionalize. They're not going to have the cash for investment fund, too. And then you're just kind of a zombie fund managing out fund one, and you're in a tough spot. So if you are able in a fund one to get institutionalized, to invest like that is like Holy Grail type stuff.
Jon: For the Harvard alums. Harvard, a lot of that, that's hard. I think there's only one fund. I remember the name they pulled in institutions, but they also focused on a niche of underserved minorities. And I don't know if they didn't have didn't have that, both combos if that would have happened.
Peter: Yeah, I mean, look, we have our fund run with mostly institutional investors.
Jon: But your fund one was really your fund two in my mind.
Peter: No, our fund, the first fund I ever managed was mostly institutional too.
Jon: Okay.
Peter: So it is possible. And you know, a good example of that is Fearless Fund to your earlier point, they're based out of Atlanta fantastic team. They focus on funding black women entrepreneurs. And their tagline is, you know, black women entrepreneurs are the most founded, less least funded. So they're like a percentage basis. Black women entrepreneurs start more businesses on a comparative basis than any other population, and yet they receive the least amount of funding.
Peter: But because of their like mission and because of who they are as like great, great investors, like they were able to attract large institutions like Ally Bank, like fifth, third, like Costco, like a bunch of others. So it is it is possible. But to your point, it's it's pretty hard.
Jon: Okay. My last question is for a first time fund manager, is there any special terms you have to throw on there?
Peter: it depends. So oftentimes what happens. So one, you have to understand like a fund structure. So there are basically three entities. You have a management company, that's the brand, right? So I mean, you think Sequoia, there's a management company called Sequoia essentially, and I actually don't know if that's the technical legal term for the management company, but there's this management company that holds the brand and then you've got a general partner and you have a limited partner and the limited partners, the actual fund.
Peter: So it's a partnership with a bunch of limited partners. They'll kick in money and then that money gets allocated to deals and the stock certificates are held at the limited partnership. And then you have a general partner. And that general partner controls the flow of funds effectively of the limited partnership. They're limited, right? So they you know, they're limited in what they can do, and that's why you have a general partner to control it anyway.
Peter: So all of that is backdrop. Usually what happens when you go out fundraise is you get limited partners into your fund, right? Your rate, your fundraising from limited partners. One of the things that's happened recently, some recently, you know, maybe over the last like 5 to 10 years, is that more and more funds are fundraising for the management company and or for the general partner, and they're effectively selling a piece of their management company or a piece of their general partnership to give them the startup capital they need in order to launch this fund.
Peter: Right, to cover legal expenses, travel, salaries, like all of those things. and so that could be a potential like term, special privilege term or whatever, where it's like, hey, I would like $1,000,000 in, you know, but maybe you invest you by, you know, 10%, 20%, 30% of that general partnership or of the management company.
Jon: So then you get percentage.
Peter: Firm for a million bucks and then ever. Yeah. And then Yeah, that's right. So you would get a cut. So you have management fees. Management fees are used to cover salary and overhead and all that sort of stuff. So management fees primarily flow to the management company. So if you own a piece in the management company, you are getting a piece of those management fee flows from every fund you know, today and into the future.
Peter: The management company also controls when a fund raises another fund. And then if you own a piece of the general partner, then you're getting usually a piece of the carry. and for that one fund as opposed to that fund and all subsequent funds, it's usually just for that one fund. So yeah, there's a lot of different things outside of that.
Peter: You know, I've seen, I've seen cases where, first time fund managers have given lower carry or taken lower carry. So instead of the standard to 20%, they take 10% or 15% or they've given their anchor investor, you know, like, hey, we'll, we'll give you a better deal on terms like lower management fee, lower carry, but everybody else pays full freight.
Peter: I've seen, you know, same thing drops in management fee or different structures around management fee in terms of like maybe you get paid only on capital that's been deployed, right. Those types of things to incentivize you to get money out the door and not just sit on your, your haunches. but I think generally I would say when you get cut on terms, you can set yourself up to lose a little bit.
Peter: And the reason for that is because it's like this signaling this signal, this negative signal, that you're, it's like you should never invest in a venture fund because you're getting a deal in terms of. Yeah, you're right. Like, it's like you should invest in a venture fund because they're good investors. And the corollary to that is like Bain charges at least I don't know if they still do, but I know at some at one point they weren't charging two and 22% management fee and 20% they're charging 3% management fee and 30% carry because they were like so confident in their ability to generate better returns than their peers that were charging 20% that even
Peter: at charging at 30%, investors would be better off investing in Bain. Right? That's like the opposite. That's like an that's a signal. That's one like really ambitious and, you know, it's interesting. I was listening to another podcast and they were talking about the history of benchmarking and kind of pointed out like that's what Benchmark did for Fund one as they came out.
Peter: They're like, We're going to charge higher fees. And he's just average and, and some of the LP is like Stanford were like pissed about it and like tried to fight him on it. but it was like this incredibly strong signal to of like, know what, we're going to knock this thing out of the park and we're going to charge fee for it because we know what we're worth, blah, blah, blah.
Peter: So, and I don't know that I recommend that for everybody, but it is kind of an interesting thing to be thinking about. Like I would just figure out like, what's market go with market, right? Market terms, is probably your best bet.
Jon: Okay, well, that works well. Thanks so much. I had one more question. I remember what it was. It must not be that good. So let's. There we go. Well, thanks for the episode, Peter. Join us for the next one. Venture capital firm and make sure you go to us because you can find where we are on all the on all the socials.
Peter: Thanks for joining.
Jon: All right. Thanks, guys.