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For Emerging Fund Managers

10 Best Practices for First-Time Fund Managers

Here's 10 things first-time fund managers can do to get to their second fund fast.

The first one is most important from Day 1.

1. Get to Fund #2 fast

For first time fund managers, the goal is to get to your second fund — quickly. 

From what we've observed, successful fund managers start raising their second fund within 12 months of their first.

Raising a second fund shows positive momentum for prospective LPs. Maybe they didn’t want to invest in your first fund because you’re unproven.

A quick second fund will quiet the worries of skeptics.

It also displays an ability to work fast, a trait that LPs look for in new LPs.

2. Raise less in your Fund #1, not more

For two reasons, first time fund managers might want to raise smaller funds:

  1. Smaller funds have historically outperformed larger funds
  2. Small funds, on average, close faster than larger funds

A larger fund may seem like a worthy goal for a first time fund manager but this is an illusion. Larger funds take longer to close, or never close at all.

Besides, if raising a large fund is your goal, then raising a smaller first fund will give you the leverage to raise a larger fund later on.

What matters most for a first time fund manager isn’t their fund size. It’s their ability to close capital and start deploying as fast as they can.

3. 100% upfront capital calls

Let’s talk about capital calls.

A capital call is when you — the fund manager — request the money that your LPs have committed. 

When an LP commits to to invest in your fund they don’t usually send the money right away. They’ll send portions of their commitment over a specific time period or when you’ve identified a specific investment. 

These are also called drawdowns. 

You might want to avoid this when raising your first fund.

Instead, require that LPs invest all of the money they’ll commit to your fund upfront.

This simplifies the capital call process and helps you move faster.

And moving faster means that you can get to your second fund faster.

4. Continuously raise capital for 12 months

Fundraising never stops.

When you raise capital continuously for 12 months, you unlock 2 advantages:

  1. More time to raise
  2. Access to capital 24/7

This relieves the pressure to raise capital at one time, then deploy.

There may be the case when you need additional capital for a deal that comes across your radar. When you’re continuously raising, you have an open pipeline of capital 24/7. 

5. Leverage markups to raise more capital

Let’s say you’ve made a few investments from your first fund and they start performing well. Their valuation has gone up since the time you invested in them. 

This is called a “markup”, when a portfolio company from your fund becomes more valuable on paper.

You can add these markups to your fund dashboard to show LPs the “progress” your fund has made.

This is one way to signal the progress that your fund (and your LPs investment) is performing well.

Share this information and you may attract the attention of LPs willing to invest in your next fund.

6. Maintain the same cost basis for all LPs

Simple is better for first time fund managers.

That’s why you’d want to keep the cost to enter your fund the same throughout the first 12 months.

This keeps things simple for your LPs and new investors.

You can even leverage the existing markups in your fund to attract LPs, as they’ll be “in the money” already. As in, they won’t miss out on the growth of your portfolio just because they’re a little later than other LPs.

Keeping the entry cost basis consistent keeps things simple for you and attractive for new LPs.

7. Focus on family and friends first

Family and friends are more likely willing investors than new LPs.

Converting them into investors is easier than chasing institutional investors.

8. Give a “1-click checkout” experience to LPs

As a first time fund manager, a fast and streamlined experience for your LPs is a must-have.

Sending PDFs or Docusign links to investors takes time and effort. 

This adds additional hurdles for your LPs that you can’t afford.

9. Leverage modern tools

First time fund managers should leverage the modern tools at their disposal.

In fact, our founder and CEO built the first version of Allocations because he felt the tools for fund managers were outdated and slow.

They didn’t fit the workflow of the modern fund manager.

For example, you could:

  • Use Slack and Telegram to communicate with investors, instead of email.
  • Use Twitter and LinkedIn to build relationships, instead of networking events and conferences.

That’s not to say that email and events don’t work or aren’t valuable. 

It’s just that speed is your biggest competitive advantage when raising your first fund.

And quick, well-designed tools help you move faster.

10. Build your first fund in minutes, not months

10,000+ investors and fund managers build, onboard and close funds on Allocations - the fastest and most advanced private markets platform in the world.

Build your first fund in minutes today.

Disclaimer: The information provided in this document does not, and is not intended to, constitute legal, tax, investment, or accounting advice; instead, all information, content, and materials available are for general informational or educational purposes only and it represents the personal view of the author. Please consult with your own legal, accounting or tax professionals.