In the fast-paced world of venture capital, where million-dollar deals are closed with the flick of a pen or a swipe of the touchscreen, the path to launching a venture fund -Successful risk can seem like a Herculean task. However, for those with an entrepreneurial spirit and a keen eye for promising startups, the potential rewards are enticing.
However, getting these rewards is the hardest part. According to investors themselves, launching a venture capital fund requires a combination of financial acumen, industry expertise, deep understanding of the startup ecosystem, choosing the right team and much more .
And it’s not just about having the financial wherewithal: it’s also about the difficult tasks of identifying unique investment opportunities, developing entrepreneurial talent, and providing strategic advice to early-stage companies. . How to start a venture capital fund from scratch and what does it take to build a winning team? Read our analysis article to find out.
One step after another
For Romanian entrepreneur Bogdan Iordache, the experience of launch a venture capital fund is still fresh – having launched seed fund Underline Ventures a year ago. First, Iordache began to identify the value the fund could bring to the market and gauged the interest potential investors would have in a new venture capital fund.
“My conclusion was that Eastern European startups launched by more experienced teams, with founders who have previously worked at successful tech companies or who have already launched other startups, are severely underserved. Fortunately, it was a good fit with my professional background: I’ve been in the tech scene for almost 20 years and I know many of these founders, as well as their needs and selection process. Or maybe it was a biased conclusion, due to my personal experience – but nonetheless, it was an area where I believed I could provide value and have a competitive advantage,” Iordache told The Recursive.
When it comes to fundraising, what worked for Iordache was that in 2021, many tech founders and operators had significant liquidity, which helped him raise the first half of the fund, begin investing and attracting capital from new LPs during subsequent closings.
For Sandra Golbreich, general partner at Baltic Sandbox Ventures, an early-stage venture capital firm focused on Baltic-based founders building deep tech and life sciences solutions, the experience was a little different .
Founded in 2018, Baltic Sandbox Ventures was not born from scratch, as it benefited from the support of a startup accelerator. However, as Golbreich explains, the venture creation process remains very different and more complex.
“We have institutional sponsors (LPs) and a few private LPs. The paperwork took a long time, spanning 19 months from creation to commissioning. Another time-consuming aspect is fundraising from private LPs. Fortunately, we had established good relationships within our local ecosystem, which allowed us to secure initial funding within a few months. However, we have observed that in many other cases it takes up to a year for other VCs due to the current market situation,” she explains.
Lithuanian investor Audrius Milukas is the CEO of Open Circle Capital, a fund that has been investing in ICT, robotics and high-tech companies since 2017. At the time, he and his partners saw an opportunity when there weren’t many others. Venture capital funds on the radar.
“Open Circle Capital (OCC) launched its first seed fund in 2017. Together with other fund partners Rokas Tamosiunas (LT), Jens Damsgaard (DK) and Will Cardwell (FI/US), we saw a window of he opportunity to invest in local startups because there was only one active venture capital fund that had virtually no competition. We thus joined forces, applied our international experience and managed to obtain the support of INVEGA, a state financial institution. We have also closed a number of corporate LPs to start operations in our €20 million fund,” Milukas shares with The Recursive.
However, as he points out, fundraising success didn’t happen overnight. “It took us more than a year to develop a fund strategy, apply for public tenders, negotiate LPAs and meet with private LPs,” he explains.
Choose the right team
Choosing the right team is the next step in creating a successful venture capital fund. In the case of OCC, Milukas and his fund partners had extensive experience in the field.
“Both Will and Jens have been managing venture capital funds, making angel investments and managing technology transfer activities in the Nordics since the 2000s. Rokas is known as one of the people who started the technology ecosystem startups in Lithuania 15 years ago by being a mentor and launching the first local accelerator – Startup Highway. Finally, my personal journey in the startup world began as a founder in 2016 when I co-founded fintech company SME Finance, which is currently among the most well-known fintech companies in the region,” reflects- he to their journey.
However, it’s not enough to have experience: sometimes the chemistry between partners can be much more important, notes Milukas.
“First of all, there must be good chemistry between the partners since you are committed to doing business together over the long term (usual duration of the fund – 10 years). You also want to have a diverse team. You need to work with people from different backgrounds such as investment management, technology development, entrepreneurship to make the best investment and fund management decisions,” he adds.
For Iordache, if one chooses to work with less experienced founders, he may want to have a larger team of partners with operational experience in the same markets/business models as the portfolio companies.
“This is done so that you can work more closely with them and guide them in their decision-making process. If you are working with more experienced founders, this is less necessary and providing operational support (hiring, communication, finances, etc.) is more important, and we have focused our efforts on building our team in this direction. And, even if we work with less experienced founders, operational support can still be helpful and a strong differentiator when we join a round with multiple investors,” Iordache tells The Recursive.
To have a team that will last for years, you need to think about aspects such as strategic vision and adaptability, among others, says Golbreich of Baltic Sandbox.
“If I were building a venture capital team from scratch, I would prioritize people with a deep understanding of investment areas and a passion for working with startups. Strategic vision, adaptability and long-term commitment are crucial since venture capital is a long-term business and the team will stay together for years. In general, the role of a GP/Venture Partner is very similar to that of a startup founder, and prior experience financing startups is truly valuable,” she adds.
Long-term commitment and responsibility
Although life in venture capital may seem glamorous at conferences, it is a demanding job that requires a lot of time and effort, notes Golbreich. Therefore, if one seeks to embark on such a path, one must prepare for a long-term commitment and significant responsibility.
“It involves long-term commitment, significant responsibilities and financial returns that come at the end of the game if you excel. In our case, the creation of a venture capital company was the logical next step after the accelerator. I therefore advise investing in startups as an angel investor or participating in private accelerators before embarking on a fundraising process for a VC. This ensures that you truly have the determination to continue this project over the next decade,” Golbreich told The Recursive.
As with any business, providing differentiated value to both your founders and investors can make all the difference, points out Iordache of Underline Ventures.
“It can only be linked to your previous experience – it’s difficult to credibly present a value proposition that isn’t linked to your previous track record. Timing also matters, and being able to explain how this relates to an immediate opportunity makes a significant difference,” he told The Recursive.
In addition to being different, a newly minted venture capital must also be superior to the competition to succeed, Milukas adds.
“Starting venture capital is a similar experience to building a startup: you need to have a great story to gain the trust of the initial investors, and then you need to demonstrate results in order to continue to grow and develop your brand,” he told The Recursive.
Additionally, it is very important to build an extensive and professional network in the target geography and strategic areas. “Despite the current movement toward data-driven funds, venture capital remains an asset class that relies heavily on building personal relationships in almost every step, from selection to making investments and their management”, underlines the Lithuanian investor.
Finally, you also have to be very patient and ready to face many failures.
“You will need a lot of patience and the ability to overcome setbacks in order to survive a fundraising process. This is a long-term play that could take up to two years of constant rejections from potential investors, pivoting and dealing with other obstacles on the path to success. Milukas concludes.
