Today’s Topic: Raising capital from LPs is hard. Want to increase your odds of success? Be different.

Being a VC sounds awesome. You get to start your own podcast, tweet hot takes, and become an expert at everything overnight. Oh, and support founders who are building the future.

You may realize that since you know some founders, and since your other VC friends can bring you in on deals they’re seeing, you’re ready to get started.

So, you throw together a pitch deck and approach LPs, telling them your big plan for investing in early-stage companies. Crickets.

Where did things go wrong?

Why being different matters to your LPs

According to Pitchbook, there are about 48,000 venture capital firms in operation around the world. That’s a lot of fund managers competing for the same bucket of investor capital.

Each time a new VC fund is created, the manager will pitch LPs on their investment strategy and hope that the LP likes the strategy enough to write a check into their fund.

The problem is that LPs hear pitches from fund managers all the time. And more times than not, they hear the same story. Like:

• “We don’t invest in a target sector, we’ll invest across all sectors.”
• “We don’t invest in a target geography, we’ll do any deal led by another strong VC.”
• “We don’t have a specific source of deal flow, we receive deals from VCs in our network.”

See some common themes?

LPs these days are getting pitched every day. And most of them ARE looking for new funds to invest in. But when so  many of the pitches sound the same, it’s hard for the LP to differentiate between all of the options.

It’s kinda like when an investor gets pitched 10+ times on startups that are building social media networks. One is going to have to stand out in a big way in order to capture an investor’s attention.

It’s crucial for emerging managers to have an investment strategy that’s unique to their beliefs, and includes a unique method of finding and partnering with opportunistic founders.

For example, listen to Charles Hudson discuss how he approached differentiation when trying to raise his first fund at Precursor Ventures.

So, what is it that LPs do want to see?

Simply put, LPs want to gain exposure to corners of the market that they’re not currently invested in.

Like fund managers, LPs understand that venture returns skew heavily toward a power law distribution.

What does this mean? Basically, a very small number of VC investments will contribute the majority of investment returns. Because of this nature, it makes sense to get exposure to diversified investment opportunities.

If you plan to raise capital from LPs, you are the diversified investment opportunity they’re looking for.

What makes an investment strategy unique?

An investment strategy can take into consideration many aspects of the investment activities at a VC firm. Some include:

• Who are you investing in?
• How do you plan to source these companies?
• When it comes time to invest, what type of deals are you structuring?
• What does your ongoing support look like for portfolio companies?

Let’s break it down 👇

Who are you investing in?

As a manager, you first have to define what types of companies and founders you want to work with. Do you have expertise in financial services, education, or health care?

Maybe you want to invest in founders located in a specific geography where you have unique dealflow opportunities. Or in founders that come from underrepresented backgrounds. You might have graduated from Stanford, and want to leverage your connections to invest only in Stanford graduates.

Don’t be afraid to niche down.

How do you plan to source these companies?

In today’s global and connected world, there are several pathways you can use to find investment opportunities.

Are you connected to startup operators? They’re often a great source of deal flow given their proximity to the startup ecosystem.

Maybe you plan to use university scouts to find up-and-coming founders. Or perhaps you have a strong social media presence that you can leverage for deal flow (more on this later 😉).

Consider your relationships, both professionally and personally, as a starting point.

When it comes time to invest, what type of deals are you structuring?

When you approach LPs to pitch your investment strategy, they’re going to want to learn about your portfolio construction.

This is just a fancy way of saying, “Tell me about the specific details of the investments you plan to make.”

They want to know the numbers behind your investment strategy and how it affects your financial projections for the fund (aka, how much money they can expect back).  

What ongoing support do you provide portfolio companies?

After you invest in a company, your job has only just begun.

One of the best ways that VCs can increase their chances of running a successful fund is by supporting their portfolio companies for the long term.

Not only does your support increase the likelihood that your investments will be successful, but it also helps you build a reputation. And that ensures that other promising founders will want to have you as an investor in their company.

Think about how you’re better positioned to help companies than other VCs.

You might have great experience in product leadership. Or maybe you have a network of successful sales leaders to serve as mentors to your companies. Or maybe you have a community of Series A investors that you can leverage to help your seed-stage companies with future fundraises.

The most helpful investors will gain a positive reputation that ultimately creates value for the VC and their LPs.

How to put it all together?

It all comes down to crafting a compelling story that answers this question: With 48,000 venture funds in the world, why you?

That’s easier said than done. But if it’s something you want to do well, then I have good news, my friends. At Camp Hustle in May, we’re going to be hosting two separate sessions on the tactics of fundraising.

The first is Tuesday morning with Charles Hudson from Precursor. He and Elizabeth Yin will be co-hosting a strategy session for emerging fund managers.

Then on Wednesday, Eric Bahn from Hustle Fund will host a breakout group all about differentiating your fund to attract LPs.

See you there?

This article was written by Tucker McKay. Tucker is the founder of Ikaria Labs, a content marketing agency for funds, fintechs, and financial services companies.