What we learned from raising our first VC fund

December 16, 2010, 10:55 PM UTC

A venture capitalist reflects on the challenges of fundraising five years after O’Reilly AlphaTech Ventures opened for business.

By Bryce Roberts, contributor

Five years ago today, December 15th, we held the first close on OATV fund I. It was an amazing day, and from a fund perspective, it was the first day we were actually open for business- free to make investments, hire employees and pay ourselves a salary. It was an important milestone. As I’ve been reflecting on the significance of December 15th, I was reminded that I’d promised a series of posts on raising a first time fund, so here goes my next post in that series. Let’s call it: Getting to a First Close.

We started raising our first fund in August of 2005. There are certain rules around how and from whom you can raise money. You can’t publicly broadcast that you’re raising a fund, what’s called a General Solicitation, and you’re only supposed to seek commitments from Qualified Investors. Its fairly similar to raising a round of venture funding in these regards, but generally a longer time table as the amounts we’re raising are larger. As we mapped out our fundraising strategy, we’d planned to run our process in two stages: a first close and a second close. We’d planned to limit the first close to individual investors while the second close would be more targeted at institutional investors.

This was done for a couple reasons. First, individual investors have an ability to move much more quickly than institutional investors. As an example, we had several individual investors make commitments ranging from $1-$10M over the course of one or two meetings. Getting similar sized commitments from institutional investors can often take 10-30(!!!) meetings (more on that in a future post, maybe I’ll call that one: Institutional Investors- The Proctologists of the Financial World). Another reason for closing with individuals first was that it would give us the ability to put money to work while we raised from institutional investors. This would give them a sense of what they were buying into in terms of the portfolio as well as expose our ability to execute against the story we were selling them.

Though we didn’t officially start raising the fund until August of 2005, we started laying the groundwork with individuals several months earlier. We generated a list of our dream team of individual investors we had direct relationships with. Once all the names and contact information were loaded into our Excel spreadsheet we were looking at a total approachable market of 220 people. We hit the phones and the send buttons until we had contacted all 220. Some were interested in hearing about the fund, some were not and some were totally unresponsive.

Armed with our laughably minimum viable PowerPoint, we started taking meetings in early August. Some days would be only a few calls or a single meeting, some days were jam packed — our record was pitching 24 people in 24 hours.

After a few months of meetings it was clear that we either needed a lead investor or an arbitrary close date as a forcing function to start herding the cats. It didn’t end up being an either/or decision — we really needed both. The lead investor materialized for us in early November. As Mark and I were grabbing lunch before yet another potential investor meeting we got the call — would we be willing to let them invest and, if so, how much would we let them put in? We picked a big number out of the air and they agreed. To say we were elated would be an understatement. This was really happening. Despite all of our short coming and all of the reasons it shouldn’t this fund wanted to happen. At that very moment, our job was simply not to screw it up.

With that commitment in hand we circled back with the other potential investors we’d been speaking to and let them know we were going to hold a first close on December 15th (a not so arbitrary date- it was a year to the day that I had told my previous employer I was going to venture out on my own). To add urgency, we also told them there would only be one close for individuals. After December 15th we would only be taking commitments from Institutional investors. This narrowed the field steeply, but it also revealed who was serious and who didn’t want to hurt our feelings.

In the end, we contacted 220 prospective investors and received commitments from 20 of them totaling $30M. That was our first close. To this day, we speak of these people in hushed tones. They put us in business. They believed in us when they had no reason to. We will forever be in their debt and they will always be welcome into any future fund OATV raises.

So that’s the story and strategy behind our first close. There are many paths to them. if you’re raising a fund, I hope there’s some value in here for you. If you’re not a venture capitalist, I hope its a peek behind the curtain that helps to shed light on how a small piece of our world works. There are a lot of reasons funds do or don’t get raised. I can tell you that at the time we were out with our fund, there were much more qualified investors with much deeper track records in the market. Some of those got raised, but many of them did not. Maybe we worked a little harder, maybe we were a little more connected but I believe that OATV wanted to happen just as much as we wanted it to. These first investors helped us make it a reality five years ago today.

Bryce Roberts is a co-founding partner of O’Reilly AlphaTech Ventures. This post originally appeared at his blog.

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