Lessons of a First-Time Fund Manager
Observations from four years of running Generalist Capital.
Friends,
Four years ago, I set out to raise my first venture fund. The result was Generalist Capital, a $15 million vehicle to invest in a small collection of (hopefully) legendary companies.
The beginning of this year marks something of a turning point. After closing on a few investments, Generalist Capital officially moved from the deployment phase to management and harvesting. That makes it a fitting moment to share the lessons learned along the way. Though venture capital is awash in content, in my view, there’s too little introspective writing on the mental game of fund management. Below, you’ll find my attempt to distill the most important lessons I’ve learned so far. To that end, these are best seen as the lessons of a first-time fund manager, relating primarily to the challenges of starting a fund and establishing an initial viable strategy.
Naturally, the gravity of these lessons will depend on information I cannot give you: my long-term performance as an investor. It will likely take another six to ten years to discover how promising a portfolio I have built with Generalist Capital, and even longer to know definitively if I am any good. As of our last update to LPs, Generalist Capital was performing in the top 10-15% in its vintage, but the data suggests that it takes about six years for a fund to settle into its terminal quartile. There’s still a long way left to run and too much uncertainty to read much into this. I am afraid that this is the best I can offer you.
Let this serve as a reminder, then, if any were needed, that you should take my lessons with a grain of salt. I have achieved little, and every investor must learn to play their own game. Though I hope they spark new ideas for you, these are just the observations of one manager at the beginning of what I hope proves to be a long career.
If this is your first time managing a fund, be extremely skeptical of your early investment urges. You’re probably overly keen to validate your existence to your LPs.
The best companies can go under the radar for a long time. When other VCs asked which of my investments I was most bullish about, I told them freely. It still took several years for a Tier 1 firm to lead a round into the company.
You do not have to wait for a round. If you have enough to offer a company, they’ll find a way to bring you aboard ahead of a formal raise. When you see a startup you love, try to make something happen.
Don’t assume you know your level. New managers often think they can’t get access to rounds led by Tier 1 VCs. With the right pitch, you may be closer than you think.
It’s very rare you see everything you want in a startup: founder, market, traction, and so on. When you do, write a much bigger check than you ordinarily would.
The first investor has a unique relationship with a founder. You can build good relationships no matter when you invest, but the first check in earns a special level of trust.
Contrary to what you might expect, the best companies are not easier to access as round sizes grow. Competition escalates as they succeed, often through late growth.
The best investors often need little more than a sentence to explain why they’ve invested in a company. The longer and more convoluted your investment rationale is, the more skeptical you should be of it.
Find your pace. A generation of managers has been conditioned to deploy vintages in 18-24 months. There is nothing wrong with taking twice as long, or more.
Just because a deal is hot does not mean it is good. Don’t let other people’s urgency influence your desire.
Remind yourself: the best venture firms in the world make a majority of bad investments. Don’t index on a buzzy name.
Conversely, if some of the best investors in the world are backing a startup you don’t consider promising, look again, extremely closely. There’s a good chance you’re missing something important.
Remember, the best investors in the world ≠ the best known investors. Calibrate accordingly.
Don’t assume the best opportunities will land in your lap. Outbound sourcing is a necessity.
Progress is never linear. A company that you had more or less written off can suddenly catch light, and one that was on a breakout trajectory can easily stall or stumble.
Don’t push your anxiety onto your founders. It’s not your job to let them know of every new company that pops up in their space.
If you’re asked for advice, give it honestly, but recognize that you have 0.01% of the context a founder has.
Fight for every dollar. Getting an extra $10K into a breakout company can make a huge difference for a small fund.
Founders respond to conviction. Earnestly explaining to an entrepreneur why you’re excited about their business and showing a desire to move quickly can overcome any number of natural disadvantages.
Be skeptical of a pitch that looks too rational. Great companies often have something paradoxical about them. If something doesn’t quite make sense, that’s a good indication you should lean in, not out.
Be careful you don’t get stuck correcting your last mistake. If you invested too little in a startup that has just started to break out, don’t triple the size of your next check to compensate. Consider each opportunity anew.
If you’re not positioned to catch a wave, don’t chase it. You could burn an entire vintage on second-and third-rate AI companies.