5 Lessons Learned from a First-Time Fund Manager

Between 2013 and 2017, the National Institute of the Entrepreneur (INADEM), a former Mexican agency of the federal government in charge of promoting high-impact entrepreneurship, supported the creation of 42 venture capital investment funds at the seed stage in the Venture Capital (VC) industry in Mexico.

Most of these new funds were managed by what is called “first-time fund managers,” who do not have a proven track record of successfully investing and generating positive returns for their investors.

Trebol Capital, one of these new funds, officially launched operations in December 2015. Since then, it has made 12 investments. The following are five lessons learned throughout the years.

1. Know Your Economics

If you go for a small fund in an early stage, without access to larger networks and without a good strategy, even if you are good, you are not going to be able to continue providing more money and capital to your portfolio companies. As a result, they are going to end up without capital. What is the use of writing a US$25,000 check if you are not going to invest more later, or if you are not going to bring more investors to the table?

In the US entrepreneurial ecosystem, you can afford to have different size funds in different stages as part of the strategy of availability but in Mexico, there is probably no other fund to take the next rounds and there are no managers to take the opportunities you initially funded. Although Mexico is developing more funds in all stages of the venture cycle, there is still a shortage and we need to find a way to connect the pre-seed and seed funds to what is traditionally called Series A, Series B and later.

Understanding the economics of the fund is not related only to the promise of 10x returns that you will give to your investors, the percentage of carry that the fund managers will shoulder or the preferred interest. It also has to do with understanding the net available cash to be allocated to the startups and the follow-on capacity for those investments after paying management fees, including the costs involved in running a trust, legal advisers and fees for tax law professionals.

If you do not consider these issues in your business model, you will not be aware that in your US$50 million fund you really only have around US$42.5 million to invest in startups but you need to work for returns of the total size of the fund. When the returns come, they have to be greater than the capital invested to overcome inflation, taxes, etc.

2. Raising Capital

Although we had an initial investment from an institutional investor, these investors want to see a track record, which clearly presents a challenge for new managers. Institutional investors often say that they will invest with first-time managers but never with first-time investors. Although we had made previous investments, we needed that previous financial experience in someone from the team and we did not have it.

When a first-time fund manager is doing the fundraising, he doesn’t imagine how long it takes and has to remember that this new fund is also a startup and has to be knocking on doors to raise capital.

From my perspective, raising capital is a lot easier when you can say that you have an institutional investor, or at least an investor who is recognized by your future investors. Remember that they do not want to take a risk by themselves and having someone you know as a co-investor means someone else thinks it is a good investment. Obviously, having an institutional investor does not guarantee that you can raise the total fund and, in most cases, they also ask you for more investors before they make a commitment.

Even so, if you start with the capital calls and your investors say no for any reason, you will be in real trouble, so you have to be careful who you choose as an investor and when to start investing what you have already raised because the entrepreneur is relying on the fund.

3. Timing, Timing, Timing

I recently listened to a podcast where VC fund managers were commenting on the importance of creating VC funds at the time of INADEM. The creation of these new funds was directly linked to the development of an innovation ecosystem and the implementation of strategies for the creation of startups in Mexico.

We cannot pretend that we are going to replicate Silicon Valley or Israel. These places have their own identity and circumstances, which they have been developing, and are not replicated even in their own country.

As a VC fund manager, you need to be aware of upcoming trends and invest according to the opportunities and circumstances around you. Do not be afraid of FOMO (Fear of Missing Out) and do not try to rush deals just to be as quick as in Silicon Valley.

4. Trying to Be the Lead Investor

While some VC funds invest alone, many invest with other VCs in a syndicate and there is a leader or lead investor. This leader will not only put in the largest check for that round, they will set the terms that the rest of the syndicate will follow because they have the expertise. Therefore, many investors prefer to let other investors take the leading role.

What we didn’t realize was that lead investors tend to be much more involved in the business. The most important factor is the level of involvement. Typically, as lead investors, they are closely associated with the decision-making process and the expertise in the new business. If you are a first-time fund, the question you should answer is: Do you have enough human and economic resources for this role?

As a small, first-time fund with 12 investments, our management team had a lot of work in the first three years and in some cases the entrepreneurs got less attention from us. If we had invested in fewer companies with greater investment in each, our approach would have been different.

5. No One Rides Alone

No one can really get to know a person in a 45-minute Tuesday afternoon pitch.  

If you are going to be working with that person for the next five to 10 years, the least you must do is to get to know the entrepreneur the best you can. It is not about missing the next best startup, it is about who you are going to work with, discuss, celebrate and enjoy the ride with. Spend some time with the founder.

Here, I want to clarify the need for a team. The rider may be a rock star but he cannot run the company alone. We have to know who is accompanying the entrepreneur on the adventure, since when, what motivates them, why they are the right people to be there and if the founder does not have a team, to see if he is capable of attracting, motivating and leading one.

I agree with Fernando Lelo de Larrea, ALLVP’s managing partner, who said that this is a people business where people invest with people, and people spend time with people. It is important to understand who you are working with because the business model of the company might change over the years but the essence of the people will not.

That said, when it comes to those new funds’ investments, we are conscious that a lot of them may be write-offs but also, hopefully, some may enjoy an exit with high returns. It is part of the evolution of the Mexican entrepreneurial ecosystem.