The Basics of Setting up a Fund
As a new fund manager, it is critical to configure your fund’s basic setup *before* you begin fundraising and investing. A fund setup consists of a clear vision, a differentiated investment thesis, plus a long-term framework for fund structure and operations. Here are the basic steps to set up a fund ahead of your capital raise:
1. Investment Thesis
Create a short description of how your differentiator gives you an advantage that other funds do not have. Describe what you invest in, how you have a competitive edge to understand/access/own these investments, and how this advantage benefits your performance. This will give your team, investors, and portfolio companies a better sense of your philosophy and expected portfolio composition.
Investment Thesis Template:
Investment Thesis Example:
- We support pioneers of the new Sustainability Era, by analyzing the latest scientific research, giving us early insights on market trends and outsized long-term performance.
Decide how you will structure your funds. Work backwards from your ideal portfolio at the end of your investment period (typically a 3–10 year horizon).
- What types of companies, number of companies, and ownership percentages of each company?
- How will you scale fund investments? e.g., change your initial check size over time, adjust future follow-on investment amounts, allocate more capital based on milestones?
- What is the minimum amount of capital you need to raise for your fund model to work?
Minimum capital needed to raise = [(number of investments) x (minimum portfolio company check size)] + [management fee]
Decide how you will build your investment team. Most importantly, ensure that your general partners/peers align with your vision and thesis. Often, strong team matches have a history of working together and complementary skill sets: investor relations + finance, tactical + strategic, product + sales/ops, etc.
- How many general partners?
- Will general partners commit capital? e.g., on average 1–3% of the total fund size
- Do general partners have a network to aid in fundraising or dealflow? Is it a requirement?
- Will you have additional investment professionals, principals, associates? Will you have an investment committee for advice or final decisions? Will they have a share of profits (e.g., carry) in the fund?
- Will individuals be hands-on or hands-off with portfolio companies? Will individuals join company boards?
- Do you share the same ethos on acquiring businesses, scaling, and exits?
4. Legal/Operations/Service Providers
Engage the service providers that will represent a majority of your fund costs and operational setup. Enlisting experts for these tasks will save time and money later.
- Legal — Engage a law firm for fund formation, deal document review, and regulatory requirements. Will you split work between your formation lawyer and dealflow lawyer? Can your lawyer defer fees until you’ve fundraised? e.g., 90 days
- Fund Administration — Hire an administrator for cash reconciliation and accounting. Which expense management tools will you use to track daily spending?
- Banking — Appoint a bank to hold your business accounts and deposits — ideally requesting a specific point-of-contact for emergencies, so a standard Chase account may not be a fit.
- Other later costs to consider — Travel expenses, tax consulting, office space, designers, and recruitment agent fees (if an agent is used)
5. Start Some Investing
Many fund managers are pressured to demonstrate a track record before investors will commit capital. If you have not yet made investments, you can reference your prior experience at a fund or previous angel deals/private deals. However, you can immediately begin establishing a new track record if you need supplemental evidence.
- Can you begin investing via angel investing, consortiums, or syndicates? e.g., AngelList, Republic, CircleUp
- Can you create an SPV (special purpose vehicle) to underwrite a single investment? e.g., Carta
- Can you perform a small initial close of capital to make a single investment? e.g., friends and family capital plus general partner commitments
By setting your fund basics, you will improve your chances of clarity and success before you pitch investors for your fundraise. Be sure to determine your basics early to attract the best investors and portfolio companies when it’s time to launch your fund.
• The 10-Point Checklist to Launch Your Business
• 12 Steps to Scale a Business
• How to Calculate Market Size
• 7 Steps To Assess Your Competition
• Competitive Advantages That Last
• Finding The Right Customer Profile
• How To Measure Results
• Know Your Niche & Costs
• Developing a Go-to-Market Plan (GTM)
• 4 Steps of Customer Discovery Before You Launch
Pitch Decks & Messaging
• How to Make a Pitch Deck for Your Fund
• How to Write an Investor Update (With Example)
• How to Write a One Pager
• 9 Easy Steps to Build Your Company’s Messaging
• How to Make a Great Pitch Deck
• 3-Month Fundraising Plan — Priced Equity Round
• 4 Steps of Customer Discovery Before You Launch
• A Simple Way to Track Your Business Finances
• The First Service Providers To Hire For Your Business
• Who Should You Hire Next?
• Customer Service Basics
• Save Your Business in 60 Days: Cutting Costs — Part 1
• Helpful Tips for Better Operations
• 5 Ways to Productize Your Business
• The Importance of Denouncing Racism
Photo by Eddie Kizka