Well, not all the time, but in general yes.
And I'm not the only one saying that. Googling in the VC blogging sphere you'll see similar comments popping up here and there.
This seems counterintuitive for those that have never raised a first-time fund, including all the ”muggies" (people outside of the venture capital eco-system), entrepreneurs who've successfully raised startup rounds but never tried to raise a VC fund by themselves, VCs who joined established VC firms as successful former entrepreneurs and could raise funds together with the other established GPs. first-time VCs who HAPPENED to have access to some easy LP money, etc...
But it's true. Trust me. During the time we're raising our own 1st-time fund, I've seen friends and strangers try and fail to raise their 1st funds, while some of the startups that they're involved with as angels moved on to raise Series A or Series B.
Well, a lot of it has to do with investors feeling more comfortable investing directly into startups, which brings a sense of ownership and involvement, than investing in a fund as a silent partner. However, different types of potential LPs are all different. It's probably easier to explain from the perspective of the LPs.
This is the most difficult bunch. Not because they're traditional or old-fashioned, but simply because that they're professional and they have a fiduciary duty in managing other people's money. Any addition to the assets portfolio that they're managing should provide the risk-return profiles that improve the portfolio performances while conforming to the client policies.
In other words, for these people you need track records. But VC funds last 8~12 years. Assuming you have set up Fund I 10 years ago and have successfully exited the whole thing, this would be the first time you could talk to portfolio managers based on your performances – of exactly 1 fund.
Industry insiders will point out that first-time VC funds on average outperform older ones so portfolio managers should take that into account. While that is true, keep in mind that VC returns are highly skewed and portfolio managers know that. Unless they could bet on 10 or even 20 first-time funds, they'll more likely hit a lemon than date a rising star. The prudent choice would be to just stay away from first funds and start with second or third funds.
I'm not kidding you – I got this feedback from some portfolio managers directly (and politely). Clean and clear.
Financial Institutions as Strategic Investors
Some traditional financial institutions never bothered to invest in VCs. They did only bonds and public equities. However, as the low-interest-rate environment continue and seeing the performances of some of the other financial institutions that waded into the VC world earlier, such as Harvard Management Company, they started to explore the possibility.
But like the aforementioned Portfolio Managers, these guys are professional and have fiduciary duties to their clients. They usually will try first to get into the famous ones such as Sequoia Capital, Benchmark, Accel, KPCB, etc. Then they're realized those funds are usually closed to new LPs as they barely could stomach all the money scrambling to come back from the old LPs.
Then they will try to look into established, non-tier-1 VC firms. There they saw the performances are much worse than tier-1 VC firms – again, this industry has a highly-skewed return distribution – and they hesitated.
But they still want to get their feet into the door, so usually they'll start to use their marketing budgets – yes, you see that right, marketing budgets – to dabble into smaller VC firms. They will come in as strategic LPs. They themselves want to get into the very tight VC network, hoping that someday when A16Z raises yet a bigger fund, they'll be able to get in via the connection of these smaller VC firms that have the opportunities to co-invest with A16Z for whatever reasons.
To raise 1st-time fund from these LPs, timing is everything. You come knock on their doors when they are internally arranging for marketing budgets – or any other expense-like budgets – to dabble into the VC world, it's very likely you'll get their money as they're all super large institutions and your $40M fund is a piece of cake to them.
On the other hand, if you come in only knowing that they've done the other 1st-time funds, most likely you'll find yourself at the end of a very long pipeline of 1st-time funds scrambling to get their money. And keep in mind these LPs are doing the first-time VC investments as well, so they don't really knw how to differentiate one from another based on strategies or deal-flow qualities. Most likely they'll just go with famous brands or famous people who try to become VCs.
After all, it's marketing.
Corporates as Strategic Investors
This is where first-time funds are most likely to see success in raising. Large corporates from all industries, with plenty of cash stashed on their balance sheets, scared by the potential disruptions from the startups, eager to keep an eye on the trends, etc.
And in fact this is also how many of my VC friends launch their first fund. Some went as far as doing a dedicated VC fund for just one big corporate.
This is also where we raised part of our 25M€ first-closing as we gathered investors such as Foxconn.
Still, there are many things that could go wrong when raising from these fellas. More might even happen AFTER you successfully raised from them.
First, corporate people are, huh, corporate people. They're not VCs. They're not entrepreneurs. They're people who rose through the ranks and landed at the strategy department or marketing department. They also tend to see themselves as larger-than-life – if you're Senior VP at Walmart, you should feel you're larger-than-life – and they are doing these investments just to keep an eye on the little guys. They don't always feel that they're doing this because they're being disrupted.
Trying to sell disruption to these fellas could be a tricky thing.
Second, as corporate people, they rotate functions or even jump ships. You might say, well, let's get the papers sign before they are gone. Well, yes or no. Keep in mind that GP-LP is a 8~to-12-year relationship. The guy that replaces the outgoing one might not be your fan. He or she might seek to get out of the contracts, triggering a horrendous series of key events to your fund.
Also never underestimate the corporates' internal politics. You might be just a tool for the people involved to do in-fighting. Stay away from these corporates if you detect such things. However much money they have, you'll never get it.
Also these corporates tend to eventually launch their own VC funds to invest directly into startups. Whether they have good deal flows doesn't matter – since they're not after the returns but for strategic values. Some of them would treat the poor startups that get their money as out-sourced R&Ds. Good luck with them but don't get involved.
(Highly) Successful Entrepreneurs
Actually, if you happen to be a buddy to Elon Musk, then problem solved. You might not even have to go to the others. In Silicon Valley there are tons of billionaires (or at least hundred-millionaires) who won't mind bank-rolling their friends who have an interesting investment thesis to become a first-time VCs.
These also tend to be the most benign LPs as they went through their own ventures and know the risks (probably better than you do). They won't quibble that much over the hurdle rates or targeted IRRs. If they're excited by your strategies, cutting a check of $5M is not that big a deal for them.
However, there are still risks with these fellas. Since they've built successful companies before, they usually want to get involved. They don't want to be silent partners. They also tend to feel that they could do direct investments better than you do, even if you have a strategy for building a solid deal flow. Especially beware of those retired ones – they will ask for face time with your portfolio companies all the time, if only to satisfy their souls as mentors. This could be good or bad for your fund. You just have to take it into account.
Random Rich People/Families
Unless you're close friends to them, forget about it. It's 99% trouble and 1% reward.
Yes, everyday you see random people launching a new fund seemingly without any effort. Still, raising a 1st-time fund is definitely hard.
To successfully raise a 1st-time fund as an independent VC, like us, it takes superior strategy for building deal flows, carefully hammering out tactics to approach potential LPs, sophisticated orchestrating of timelines, proper and to-the-point PR campaigns that will cost you money up-front, and fundamentally just lots of lots salesmen's skills.