#1 My First Fund: 6 Preliminary Questions.
Sharing our thought process before launching Kara Ventures.
Building something always starts with a conviction. For us it was: increasing access to smart angels’ capital and expertise for pre-seed and seed startups in Africa. We wanted to take business angel investing to the next level and bring our young and fresh touch to professional venture capital investment. In this post we’re sharing with you the 6 questions we asked ourselves to guide us through this first time fund manager journey. Hope this will help other folks thinking of launching a micro or pilot fund.
Remember, emerging fund managers are grinders hungry for success so you have to be innovative and resourceful.
For context, Jérémy and I invested small checks (less than $20k) in about 30 startups and advised about 100 startups before launching our fund. We both had experience as operators - Jérémy at Spendesk (a French fintech unicorn) and me at Fenix (now Engie Energy Access - the first successful acquisition in the solar home system / asset financing space in Africa). We never invested professionally before, so we are very thankful for our backers’ support!
#1 Structure: BA tickets, raise SPVs, or set up a fund? Which jurisdictions?
Raising SPVs.
The easiest way to get started to build your track record as an investor is to raise single purpose vehicles (SPV) on a deal-by-deal basis.
If you have access to deals but limited capital to invest, there are usually three paths:
Business Angels Tickets. You invest individually small business angel tickets ($1k - $25K).
Syndicates. You are the lead proactively sourcing and structuring the deals. If you are able to secure a larger allocation than what you can personally invest, you can set up an SPV and fundraise with your network. The global leader is AngelList, in Europe Roundtable and Vauban are following suits, and in Africa Pariti and Daba Finance position themselves as the private market retail platform for Africa. You can charge carried interests (20% or lower if you are getting started) to align your interests with the investors, i.e. if the company succeeds you’ll get a percentage of the capital gains on your investment. The costs of setting up and operating the investment vehicles are often shared with the investors by charging a flat fee per transaction (e.g. AngelList charges 10% of the total amount raised - they just increased it!).
Club deals. You are a group of operators or others who have access to deals. There are multiple models here. You can set up a club deal to co-invest with friends, in this case you don’t charge carried interests or any other fees. You can also set it up with a larger community of members where each member pay a fee to have access to the deal flow and other content. The distinction with a syndicates becomes tenuous when you start charging carried interests on a deal-by-deal basis, although club deals are known to be more community driven, create more content and events for their members. In Africa, HoaQ has done a nice job at productizing club deals; they invested in 90 companies in 3 years with a max ticket size of $20k.
To decide which path would be the best fit for us, we listed our objectives:
Setting up SPVs means continuously fundraising (although we are aware that it could mean raising more capital because you can get more momentum on deal-by-deal SPVs).
We want to dedicate our time to sourcing best teams and support them to get to Series A faster (including making follow-on investments).
We want to build a community of backers supporting us through our learning and knowledge sharing expedition across AfricaTech.
We want to build a strong brand as super angels bringing their entire community with a check.
We see SPVs as an add-on to give access to our deal flow to a larger community, but not as the the main way we want to operate. It is also a good way to test the waters, if we think of expanding to LATAM for example.
Hybrid Approach: Fund + SPVs.
We decided to pursue a hybrid approach! We raised a fund (GP/LP) in Delaware with our backers so we don’t have to be continuously fundraising while we can still set up SPVs on a deal-by-deal basis. E.g. follow-on investments or when we get a bigger allocation than we can commit to with our pilot fund on companies we have a strong conviction.
The reality is that if you are raising a much bigger fund you are continuously fundraising anyway, but given the size of our fund we can dedicate more time to sourcing and supporting our companies than to fundraising.
Jurisdiction: Delaware.
We compared Delaware, Luxembourg, Mauritius and France. The winner was Delaware for the following reasons:
Standard documentation and streamlined process providing visibility and clarity.
Quick to incorporate and operate entities.
You don’t need a license! You can start investing right away.
Competitive pricing.
Eligible for fund admin tools = less admin more time to focus on the deals.
I am a qualified lawyer in the U.S. (California).
90% of the companies in which we invest have their fundraising entity in Delaware.
Limited partnership (legal entity in which LPs are investees) is a pass-through taxation entity.
Worldwide recognized jurisdiction for business transactions.
The emergence of fund admin platform is game changer for setting up and running a VC funds as a first-time fund manager who has no time to deal with the admin. Note that it is not the most cost efficient approach and we were very intentional about setting up a fund to have a first hand experience as fund managers. I’ll publish a separate article comparing the services and costs of fund/SPV infrastructure and admin platforms. The UK has a nominee structure that is very cost efficient.
#2 Ticket size : spray and pray $25k tickets or build relationship with founders to invest up to $100k tickets and follow-on?
This is an important question to maximize profits. Initially, we wanted to write fast checks of $25k in as many company as possible to get the largest exposure to startups in Africa and learn fast. However, we realized three things:
It is critical for us to maintain the same level of due diligence for all our investments regardless of the committed amount.
We want to be able to have sufficient time and resources to support our founders. We work on automatizing our sourcing process and deal flow management, but we are still just 2 fund managers part-time!
We want to be able to take larger bets (in single or successive investments) to increase the potential net return.
We decided to invest between $25k-$100k in 20+ company and reserve a portion of the fund for follow-on investments. This is also a hybrid approach in the sense that we can invest early-on our minimum ticket size and follow-on with a larger ticket. However, we have no intention to lead rounds.
our strategy: $435,000 (max $5M pre-money); $745,000 (max $15M pre-money); $600,000 (Follow-On); no Board seat; followers.
#3 Thesis: generalist or specialist fund?
We considered the following drivers to build our investment thesis:
Deal flow. The majority of the deals in Africa are fintech. If you look closer at companies that are not fintech at their inception, you’ll notice that as soon as they get qualitative data on their customers, they develop a fintech (or as we say now: “imbedded finance”) feature to grab that opportunity to provide access to financing.
Our Conviction. This first fund is a pilot fund so we didn’t want to limit our scope to fintechs. Our main drivers is to find the best teams at the earliest stage of their venture and back them through their Series A.
It made sense to keep it general to be able to support the founders for which our investment would be the most relevant and impactful. That’s how we came up with our tag line: investing in startups that want to hire us!
#4 Fund size: $1M, $5M or $10M?
We considered the following factors:
Side-fund. We are not full-time investors.
Pilot fund. This is our first fund.
Fund expenses. It costs us $15k year to run the fund (although we intent to cut this in half).
Our initial target was $1M to be able to write checks with our side fund as we meet exceptional founders and work on proving our model. We are very happy with this decisions as we still want to be entrepreneurs building alongside our founders.
We increased our target raise to $2M because it made more sense economically given the fund expenses which are still quite high for micro funds. We are not charging management fees and will recycle part of the proceeds in order to invest 110% of the fund to increase our investable capital (and net returns).
#5 Backers: tech angels, family offices, institutional investors?
Naturally we reached our to our network of tech angels interested to have exposure to AfricaTech and learn alongside us for the first milestone of $1M. The deciding factor on our end: do we want to bring them on a trip with us?
For our second milestone of $2M we welcomed family offices for two reasons:
Get access to larger checks to limit the total number of LPs to 30.
It’s an opportunity to learn how to deal with more institutional investors.
#6 Brand: why would founders take our money? Why would investors bet on us?
The brand is key to first-time fund managers! Our strong conviction is to be a new generation of investors leveraging their community, medias, and continuously investing with passion. It’s much more than a job.
Our approach to creating content and investing is built around two questions:
How can we transfer the most knowledge to our founders?
How can we productize micro-funds by automatizing fund formation, investors onboarding, reporting, deal flow sourcing (and maybe down the line investment decisions) with limited financial and human resources?
🚨 This article need to be saved by all people who want to build a VC Fund one day!
Thank you for sharing your journey. This has incredible value for future investors who are afraid to take their first steps. Grateful Dona.