This was the answer I gave on Quora:
Raising a fund is a complex and time-consuming process, with the legal aspects only one piece of the puzzle.
1. So you want to raise a fund, but can you raise a fund?
Well before speaking to a lawyer, you’ve got to survey the market to get a sense of the reality and potential timing of your plan.
Raising money for a new fund is akin to running a start-up; put together a basic plan, share that plan with lots of smart people, get advice and solicit new contact, refine the plan, rinse, repeat…
I’m not going to get into the issues of who is likely to be successful raising a fund and who is not – the market will tell you that in short order.
2. If the answer to 1 is that you can’t raise a fund right now, set up a very simple LLC and get busy angel investing in an organised way as if you were running LP capital. Have a clear philosophy of investment, similar to what you’d be selling to LPs in a fund format. Keep copious records, which will invariably be called upon when you hit the fund-raising trail anew. Potentially lead a few investment syndicates, gaining experience driving the negotiation and documentation process for a transaction. Also gain board experience, something which will also be scrutinized when it comes to raising capital from sophisticated LPs.
3. If you do get the warm fuzzies from a critical mass of LPs whom would represent at least a first close of the fund, then the documentation process needs to kick into gear and a lawyer needs to be engaged – now. Unless you are able to lock in enough commitments day 1 to achieve your target fund size, then you will likely hold an initial closing and keep the fund open for a period of time. Depending upon whether your first close is a “friends and family” round or a true institutional LP raise, the flexibility you’ll have with respect to subsequent closes will vary widely.
4. Some key issues to consider in your document:
- How long the fund will stay open
- The basis on which new investors will join the partnership
- Fee terms
- How management fees will sunset over time
- GP contribution of legacy angel investments, and the cost basis of such transfer
- GP total capital commitment
- Reserve policy
- Portfolio construction
- …and more
5. Institutional LPs will want to know a lot about the GP – other partners, their backgrounds, how they’re being compensated and more. The amount of due diligence that will be performed on you and those associated with your fund will exceed your wildest expectations. They will ask for a list of current and prior relationships. You will give it to them. And then they will call 2-3x the number of people you’ve given them by doing research on you and working the phones. Don’t be surprised by the emails you’ll get from former colleagues who have been contacted by the potential LPs. The number will be staggering.
6. Solicit input on “best practices” reporting and LP relations. As with raising venture capital, LP capital comes along with a series of obligations that are important to understand upfront. Transparency, clarity and humility are vital. This is clearly not an exhaustive list but hopefully this helps.
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