Are you an aspiring first-time fund manager interested in setting up a VC firm and raising a fund?
Do you think you have the insight and skills to find promising startup founders and early-stage companies and achieve a “venture rate of return” of at least 3X?
Then, you’ll first need to establish a management company responsible for managing the VC firm’s operations before raising capital for your VC fund and beginning to write checks.
Before diving in, let’s agree on a definition of a VC fund. Venture capital is a subset of private equity and is similar to a private equity firm or a hedge fund, in which a pooled investment fund raises capital from multiple investors (limited partners) to source investment opportunities.
In contrast to PE or hedge funds, VC funds invest in private, early-stage startup companies with high growth potential in exchange for equity in those companies. The goal of a VC investment is to make a profit for investors when the company exits through an IPO, merger, or acquisition.
Many new managers underestimate how long it takes to establish a reputation in the market. The early years are often filled with heavy networking, education, and proving to LPs that you can consistently evaluate risk and identify winners. These foundational steps are just as important as raising capital.
Venture capitalists, or general partners (GPs), are invested in the fund and typically play active roles in their portfolio companies, serving on boards, providing strategic advice, making introductions, and helping secure additional financing.
Fund sizes vary from a few million dollars ($5-$15 MM) for a small fund doing pre-seed investments to several hundred million for later-stage growth funds backed by institutional investors.
If you are raising a small fund, keep in mind that management fees will be limited. Early fund managers must stay lean, automate workflows, and rely heavily on efficient deal management tools.
Setting up a fund may vary depending on the investment stage, the sector or industry, and the performance objectives for its portfolio companies. Full-time GPs typically require between $20 MM and $40 MM per head in fund size to cover salaries and expenses, assuming a 2% management fee.
This article will help emerging fund managers understand the VC business model, set up the management company, and raise capital for their venture capital fund.
Build a Track Record or Have a Competitive Advantage
You’ll have a tough time finding limited partners willing to invest their money if you don’t have a track record of successful investing.
Even a modest track record: angel investments, syndicate participation, or experience at a startup signals to LPs that you understand venture mechanics, cap tables, and founder psychology. More importantly, it shows that you have already built a pattern-recognition framework.
So, before launching a VC fund and reviewing pitch decks and business plans, it’s crucial to spend some time in the venture capital ecosystem or investing your own money as an angel investor, giving you the chance to learn the processes and how to provide value for your LPs and portfolio companies.
This is also where you’ll develop your network. Connections are critical in venture capital. There’s no point in starting a VC fund unless you are exceptionally well-connected and have experience working at a successful venture capital fund or angel investing.
If you are an operator (former entrepreneur, executive, or subject-matter expert) who can provide hands-on guidance or mentorship and leverage your professional networks to fundraise and help early-stage founders, we recommend partnering with a “financial” VC or someone with a track record of putting institutional capital to work.
In some cases, a VC without a “brand” works with one who has a personal audience, such as a large LinkedIn following. You might have money, but you need someone with knowledge and connections, or the other way around. The point is that it’s often wise to find a partner to start your VC fund who brings a complementary skill or experience to the firm.
As a General Partner, you are expected to “have skin in the game” by contributing to your fund, ensuring you and your partners have a strong interest in the fund’s success. On average, GPs contribute around 2-5% of the fund’s total size with their own money.
If you are raising $50MM for your new fund, you and your partners should personally contribute between $1MM and $2.5MM. If you and your partners are not high-net-worth individuals and don’t have the liquidity to write those initial checks, there are still multiple ways to launch your venture capital firm.
Define Your Investment Thesis
The venture capital industry is small, tight-knit, and very competitive. To convince LPs and potential companies to take you seriously, you’ll need to bring something new to the table regarding your investing strategy. Developing an investment thesis helps you define your brand and serves as a key resource for fundraising for your fund.
A strong thesis does more than explain what you invest in; it tells LPs why you will win. LPs look for a clear rationale behind your sourcing pipeline, decision-making, and concentrated expertise.
To develop a compelling investment thesis, you and your partners must meet with potential LPs, including family offices, endowments, high-net-worth individuals, pension funds, and advisors.
As you build your fund and start raising capital, you will iterate and refine your thesis. Your investment thesis will be largely influenced by the feedback you receive while starting your venture firm, conducting research, and raising your first fund.
We recommend you write down your investment thesis by following the format below:
(Fund Name) is launching a ($xMM) (stage) venture fund in (location) to back (geography) (sector/Market Companies) with (secret sauce).
For Example:
Gem Ventures is launching a $100MM Seed Stage and Series A fund in New York to back East Coast Fintech companies sourced from the partner’s network built while working at the investment banking division of a big national bank.
For instance, when Rajat Bhageria and Nandeet Mehta founded their first venture fund, Prototype Capital, they had very little capital, so they needed a way to differentiate themselves from other VCs. They hypothesized that traditional industries like healthcare, transportation, consumer packaged goods, and manufacturing would soon undergo transformation, but those people aren’t holed up in Silicon Valley. Their differentiator was their scout network, which could find founders and successful startups across the country that other VCs weren’t even paying attention to.
Investing Decision Making
How are you going to make investment decisions? What factors will go into determining company valuations?
Will you invest the same amount of capital in each company? Will you be making follow-on investments? Ideally, it would help if you had given thought to all these questions before formally starting conversations with limited partners.
New managers must also determine how they will handle competition. With mega-funds writing early checks, differentiation often comes from speed, founder rapport, and unique insights, not just valuations.
As an emerging manager investing in early-stage private companies, you need to be adept at measuring, evaluating, and minimizing risk while generating significant returns. This is both an art and a science and a key to your success as an investor.
Moreover, focusing on cash flow analysis can be instrumental in evaluating the sustainability of portfolio companies, especially in sectors where liquidity management and operating efficiency are critical.
Even though early-stage investing is not cash-flow driven, understanding how a company manages burn and runway is essential. LPs want assurance that you can evaluate both qualitative and quantitative risk.
Establish Your Venture Capital Firm
As an emerging manager, you will spend most of your time and energy raising capital for your fund, yet setting up your firm, legal entities, and back-office processes is imperative to its success.
Generally, venture capital funds are structured as limited partnerships. Limited partners provide capital, and the general partner manages it.
Typically, the general partner operates within a management company that exists as a separate legal entity from the fund. It’s essential to establish this legal entity before you start raising money and scheduling meetings with potential portfolio companies.
This is also where the economics of venture capital come into play. Most managers rely on carried interest as their primary long-term wealth-creation engine. Because carried interest only accrues after returning capital to LPs, the early years require patience and operational discipline.
When it comes to setting up the limited partnership agreement (LPA), the devil is in the details, especially those areas that pose a significant risk, including the fees (management fees, carry, incentive fees, etc.).
Understanding these fees is crucial since they can ultimately affect the fund's and, therefore, the LPs' performance. As an emerging manager, you should also hire a trusted accounting partner with experience in venture capital to ensure the fund structuring is tax-efficient and to work with you during audits and throughout the fund's lifecycle.
Setting up an LPA and establishing the LLC are not tasks you can manage yourself. It’s best to find a competent lawyer to set up these legal entities for you, ensuring everyone is protected. The legal costs of setting up a VC fund can range from $30,000 to over $400,000, depending on several variables.
Similar to other businesses, emerging managers should take into account operational aspects such as:
- Personnel and staffing
- Cybersecurity and data protection
- Compliance and regulatory
- Selection of professional service providers
- Office space, travel, and other logistics
- Software platforms and technologies
To understand the multiple steps required to set up your venture capital firm, read this guide from BDO.
Defining a Due Diligence Process
By definition, venture capital investments in new businesses are risky, so due diligence (DD) is essential to running a fund. Since proper DD can be time-consuming and tedious, you’ll need to establish a process.
Having a structured DD process early also builds trust with LPs. They expect you to document assessments clearly, not make decisions based solely on founder charisma.
Typically, for every 100 companies reviewed, 10 will receive a detailed review or undergo due diligence, and the fund will invest in one of them.
Every firm approaches due diligence differently, and every potential investment calls for a different approach; however, most investigations tend to fall into these categories: management team, market, product, traction, legal, and financials.
You should also develop a red-flag framework, signals that immediately disqualify a deal. This reduces emotional decision-making and keeps your pipeline efficient.
To be effective during this process, you must establish a workflow to collect and evaluate this information. You may do the research yourself, hire an assistant to compile reports, or outsource to another agency. You’ll need these reports for any company you consider, so design a process that doesn’t take up too much of your time.
To learn more about venture capital due diligence, read this checklist.
Selecting the Ideal Venture Capital Tech Stack
As a GP, you will most likely not have the budget to hire multiple employees when launching your first fund. However, you will be very busy fundraising, sourcing, analyzing, investing, and supporting your portfolio companies.
Adopting the right technology stack is crucial to increasing your productivity and the fund’s chances of success. At a bare minimum, we recommend getting subscriptions to Pitchbook and Crunchbase to access the data you need when evaluating potential deals.
As far as software, you should adopt a CRM system to automate, optimize, and standardize the deal-making process. However, not all CRMs are created equal. Most transactional CRMs, such as Salesforce, are designed for sales teams focused on closing transactions, NOT managing sophisticated venture capital deals.
Investing in early-stage ventures is very different than selling a product.
Emerging managers should look for a CRM that understands your firm’s workflows and nuances.
At 4Degrees, venture capital is in our DNA. Our founders are former VC investors looking to change the relationship between venture capital and CRM by creating a system designed to address their specific pain points.
We built our venture capital CRM for busy investors who want to leverage their networks to access high-quality deal flow, find and execute deals, and manage their portfolios and internal processes.
4Degrees automatically captures an investor’s email communications, meetings, and contact information, and analyzes these data points to help VC teams find the right connection and the best path to a warm introduction that can result in a deal.
Building Long-Term LP Relationships and Preparing for Fund II
Beyond launching your first fund, emerging managers should think proactively about how they will nurture limited partner relationships over the long term.
Most LPs will evaluate your readiness for a second fund well before the end of the investment period, often looking at your operational discipline, communication cadence, and early portfolio signals. This makes it essential to build a repeatable system for tracking LP interactions, maintaining warm relationships, and documenting value delivered.
One core part of Fund II readiness is demonstrating that you can manage your portfolio with structured processes. LPs appreciate when GPs can clearly articulate reserves strategy, follow-on pacing, early write-ups or write-downs, and the operational guidance they provide portfolio founders.
Meanwhile, transparency matters as much as performance. Sharing insights about market conditions, lessons learned, and how you are refining your investment thesis helps LPs view you as a thoughtful, adaptable manager.
Going Forward in Starting Your VC Firm
We’ve given you a high-level overview of what it takes to set up a venture capital fund, but you will inevitably encounter challenges and obstacles. We recommend finding an advisor or attorney to walk you through the process. If you establish your fund properly, you will be able to devote all of your attention to raising money and finding great portfolio companies.
The final piece of advice: raise slowly, deploy thoughtfully, and communicate consistently. Your first fund establishes your reputation for the next decade.
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