Last week, we had the privilege of hosting Tim Flannery and Ben Doran, Co-Founders of Passthrough, as our guest speakers for our second session of the Essential Fund Launch Webinar series. Throughout the blog, we’ll cover the webinar topics; the current state of fundraising, and details on the closing process. The timing for this session could not have been better, as Passthrough recently released their new state of fundraising report, which surveyed 100 fund managers to highlight the challenges in today’s private markets. You can download the report here.
How would you describe the current state of fundraising in the venture capital industry?
Some may say it’s “pretty rough.”. The State of Fundraising survey revealed that 80% of fund managers find the current environment difficult or extremely challenging. Despite this, there is a degree of optimism, with 80% of managers still confident they can meet or exceed their fundraising targets. This confidence may be attributed to their positive outlook on the macro environment, with nearly seven out of ten fund managers expecting improvements in the next 12 months.
Although the industry has faced challenges, the long-term trends remain favorable, as the alternative space is projected to grow at a rate of 5 to 7% annually, becoming a $24 trillion industry. This statistic isn’t a surprising development for most venture funds. VCs have been quick to understand that there are many opportunities with family offices and retail investors, who account for 50% of the country’s wealth but only 16% of alternative assets. Despite the difficulties, fund managers are working hard and remain determined to surpass their goals.
What are you seeing in terms of fundraising strategies and investor preferences?
Fund managers are facing challenges in bringing in new investors and securing commitments from existing ones, as operational due diligence requirements become more stringent.
To navigate this landscape, fund managers are becoming more resourceful and adopting more frequent closes to raise capital. Additionally, they are diversifying their investor base by adding more international investors, family offices, institutions, and retail investors. The focus on environmental, social, and governance (ESG) factors is also prominent, with around three-quarters of fund managers considering ESG an important aspect of how investors evaluate them.
Another notable trend is the adoption of technology in fundraising and investor relations. Many fund managers are utilizing AI for data analytics, finding new investors, conducting operational due diligence, and even personalizing communication strategies. Brand building and effective communication have also become crucial in differentiating firms.
Investors, on the other hand, have gained opportunities with access to funds that were previously inaccessible. We’ve even seen around 80% of investors requesting liquidity through secondary transactions on their LP interests. More favorable terms and co-investment opportunities are also being offered to LPs.
What are some challenges that venture capital firms typically face during the fundraising process?
The fundraising process is a very similar process to a sales effort, where effective communication, timelines, and deadlines play a crucial role. It is essential to maintain a clear timeline and inform potential investors about closing dates to ensure a critical mass of commitments. Focusing on the right investors is equally important to avoid spending too much time on prospects who may not invest.
Seeking guidance from experienced fund formation counsel and fund administrators is also vital. Working with professionals well-versed in assisting emerging managers can streamline the process, providing the necessary materials and ensuring a professional and efficient approach. Using the insights from experienced advisors prevents complications and ensures that the legal aspects of the fundraising are handled smoothly.
Are there any notable differences in fundraising strategies and challenges with these first-time fund managers?
When it comes to first-time fund managers, the fundraising journey is undoubtedly challenging. The absence of a fund’s track record makes it difficult to get started. However, there are ways to overcome this hurdle and pave the way to success. Some emerging managers leverage their track record of angel investments to establish credibility and gain initial traction. Another approach involves starting with an SPV strategy, forming special purpose vehicles to make individual investments. While this strategy has seen success in certain cases, these first-time managers ultimately aspire to launch a full-fledged fund. The allure of a fund lies in the stability it offers, including a reliable source of management fees to build and expand their business structure.
Interestingly, recent data sheds light on notable differences in fundraising trends for first-time fund managers. Comparing the average amount of funds raised from 2008 to 2021 with the period from 2020 to 2023, there has been a 20% decline in the average amount raised. First-time managers are raising smaller funds compared to a few years ago. The competitive market landscape contributes to this trend, as there is less available capital for everyone. Despite the challenges, the outlook remains optimistic, as emerging managers continue to embark on the fundraising journey successfully.
How have investor expectations and preferences evolved in recent years and how does this impact the fundraising process?
The demand for consumer-style experiences has become a dominant trend, where investors expect seamless interactions and streamlined processes throughout their investment journey. This shift has been catalyzed by the rise of electronic subscription documents, replacing traditional paper sub docs, and reflecting the broader trend towards digitization and simplicity.
As a result, fund managers are now compelled to offer user-friendly platforms and robust communication channels to meet and exceed investor expectations. The emergence of modern technologies, such as AI and digitized subscription platforms like Passthrough, has further accelerated this transformation, making it easier for investors to access data, documents, and investment opportunities.
By adopting such technologies, fund managers can enhance the investor experience, increase efficiency, and gain valuable insights into their funds. A positive and efficient investor experience not only attracts more investors but also helps fund managers focus on the core aspects of their business, contributing to overall success in the competitive venture capital landscape.
What are some of the key steps involved in completing a subscription closing for a venture capital fund?
The process usually begins with the preparation of materials by an attorney and identifying potential investors with soft commitments. Once enough commitments are soft circled, a date for the closing is communicated, and subscription agreements are sent out to investors. These agreements, containing around 150 questions, are essential for understanding investor eligibility based on tax returns and securities laws.
After investors fill out the subscription agreements, they undergo a review by counsel to address any complexities or errors. Additionally, the KYC (Know Your Customer) process comes into play, where the identity and eligibility of investors are verified.
Simplifying this can make the entire process significantly more streamlined and easier for investors. Platforms like Passthrough reduce the number of questions to about 30 on average, streamlining communication and automating emails for a more efficient experience. By mastering these key steps and utilizing technology to their advantage, venture capital fund managers can achieve smoother subscription closings and create a positive experience for their investors.
Why might a fund manager decide to not only use legal counsel and use DocuSign for subscription closings? How does Passthrough work with legal counsel?
When considering the use of legal counsel and DocuSign for subscription closings, there are several important insights to consider. Passthrough is complementary to existing legal teams, ensuring that the workflow aligns seamlessly with the subscription agreements used by law firms. One of the reasons why many prefer using Passthrough is the professional appearance it lends to the entire fund process, ensuring a positive impression on investors. Additionally, Passthrough significantly reduces the time it takes for investors to complete subscription agreements, addressing the shopping cart problem that may lead to delays in the process. The tracking capabilities of the platform provide visibility into the progress of each investor’s subscription, making it easier for fund managers to remember and follow up with them.
For both emerging and established fund managers, using Passthrough streamlines the coordination process, especially when dealing with different jurisdictions and various teams involved in reviewing and approving the documents. The workflow tool is designed to accommodate complex coordination challenges and ensure a smooth closing process for both small and large-scale fundraising.
How do you approach working with established funds and traditional LPs who may have a more conservative or traditional approach?
When working with more established funds and traditional LPs who may be hesitant about adopting modern tools, there are challenges of transitioning from traditional paper-based subscription documents to online platforms. However, our experience has shown that the fear surrounding this shift is often overblown.
While some may still prefer the traditional approach, Passthrough offers support and ensures that the data is collected and structured efficiently for their convenience. The real value we provide lies in the ease of data extraction and the ability to plug it into various systems, making it simpler for both the legal team and the investors. Just like how LP portals became the industry standard, digitized subscription platforms are becoming increasingly accepted in the industry, marking a positive direction toward embracing technology for more efficient fund operations.
What are some of the best practices for streamlining and optimizing the subscription closing process?
When it comes to streamlining and optimizing the subscription closing process, there are several best practices that can significantly improve efficiency. Utilizing modern software like the Passthrough platform has proven to be a fantastic option for simplifying the process. Additionally, ensuring swift legal review is crucial. Promptly addressing any mistakes or issues with the subscription documents can prevent unnecessary delays and reduce stress during the closing period.
For emerging managers, the closing process can be more demanding and stressful, so maintaining smooth operations is essential. By using a platform like Passthrough, fund managers can easily track the progress of investors, address any inquiries, and keep the process moving along efficiently. Time management is vital since everything operates on a timeline. Being speedy and maintaining professionalism are key aspects to consider for a successful closing process.
Can you elaborate on the functionality of the Passthrough tool and how it specifically streamlines processes related to fund management and subscription processing?
The Passthrough tool is a powerful solution that greatly streamlines the subscription closing process. One of the core challenges it addresses is the unstructured data scattered across various platforms, making it difficult to access, reuse, and integrate seamlessly. Additionally, the lack of visibility into the progress of investors creates uncertainty and inefficiency. With Passthrough, these obstacles are overcome through a customized and user-friendly workflow designed to align precisely with the specific fund agreement. Investors are invited to complete a tailored questionnaire, ensuring they answer relevant questions accurately and avoiding unnecessary repetition. The platform allows fund managers and legal counsel to stay on the same page, expediting the review process. Once everything is in order, the closing documents are signed, and all data can be effortlessly extracted into existing systems. The real power of Passthrough lies in the time saved, as subsequent fund closings become a breeze, with most investors confirming their information swiftly and smoothly.
How do Vector and Passthrough work together?
Vector and Passthrough work together to streamline the closing process for fund managers. When you engage with Vector for the back office, the team works closely with Passthrough right from the beginning. The Vector team oversees the entire closing process, ensuring that everything runs smoothly. Once the KYC and AML checks are completed and the subscription agreements are signed, the two teams work together to onboard all the investor information from the Passthrough platform, into the Vector system, Valence.
The benefits of this collaboration are significant. First, it is an incredibly fast process from closing to onboarding LP information into Valence. This allows a fund manager to move quickly in case they need to call capital right after closing. This is compared to the traditional manual process, which can take even a week or more.
Additionally, the streamlined approach enhances the overall investor experience. With a dedicated point of contact at Passthrough for all Vector clients, the entire process becomes seamless and efficient, providing the fund manager with the professionalism and speed that institutional investors value.
Thank you again to Ben and Tim for such fantastic insights on the state of fundraising and closing process. The series will continue with a Passthrough part two this week, focusing on KYC/AML.
Disclosure: The content presented in this blog post is based on notes taken during a webinar and is intended for informational purposes only. The information provided in this blog has not been reviewed or verified for accuracy by any official or authoritative body. While every effort has been made to ensure the reliability and accuracy of the content, readers are advised to use their discretion and judgment before relying on the information provided herein. The authors and publishers of this blog disclaim any responsibility for any errors, omissions, or consequences arising from the use of this information. For official and comprehensive information on the subject matter, we recommend referring to reputable sources or seeking professional advice.
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