New Fund Structures and Strategies

With James Norman, Jennifer Neundorfer, Nancy Torres, and Sheel Mohnot

As venture capital fundraising skyrocketed in 2021, a new generation of investors struck out on their own to launch new funds. Jennifer Neundorfer (managing partner, January Ventures), moderated Nancy Torres (partner, Ulu Ventures), James Norman (and Sheel Mohnot (co-founder and general partner, Better Tomorrow Ventures) in a discussion about the current climate and their own approaches as emerging managers.

Differentiation in a crowded market

The proliferation of new funds and fund managers has “helped break down some of the traditional networks in venture,” Jennifer said, but “it also makes things noisier and more competitive.” Differentiation is more important than ever.

For Sheel, the differentiating factor is specificity: Better Tomorrow only invests in fintech and only leads seed and pre-seed rounds.

At Ulu, Nancy’s differentiators are a focus on diverse teams and her team’s expertise in decision analysis. Research shows that diverse teams already outperform more homogenous ones, she said.

At Black Ops, James said, one aspect of the fund’s differentiation is clear: The fund only invests in Black fintech founders. But “it’s not just how you think about differentiation,” he said. “It’s how the person you’re talking to will hear it, what they’ll hear.” For Black Ops, that means showing LPs that the fund has access to alpha that others don’t have.

Changes in the fundraising market

As the venture market shifts in response to macroeconomic forces, LP terms and fundraising strategies evolve with the market, Jennifer said.

Sheel agreed, but believes the changes are “really much more a return to what things were like a few years ago—like in everything else.” In 2020 and 2021, timelines were often compressed; his firm raised its Fund II just two years after Fund I. Now we’re seeing a shift back to longer, three-year timelines.

When to exit investments in a scarce IPO market is also “a conversation that’s coming up more,” said Nancy. Looking at DPI and not just TVPI, and taking things off the table, will become more important, the panelists agreed.

Relentless relationship-building

As the interval between funds lengthens back to the three-year norm, emerging managers need to pay more attention to developing LP relationships. Nancy said that just going to events is not enough—you need a plan, and you need to set up meetings beforehand. For her, the NAIC (National Association of Investment Companies), the RAISE Summit, and Latinx VC have all been helpful.

James said that being creative and approaching “people who haven’t done this before” works for Black Ops. LPs in this market are looking to get into newer funds—they’re still developing a strategy, they’ve got to start somewhere, and that can be a first fund.

Many of Sheel’s LPs came in through introductions by other funds they coinvested with. Recommendations, he said, still carry a lot of weight. Regular check-ins with LPs also let him know which LPs are still writing checks.

Institutional LPs as a “catch-22”

Institutional LPs can feel like “a bit of a catch-22” for first-time fund managers, Jennifer said. They want to meet GPs early, but often they just don’t underwrite first or even second-time funds. Common wisdom is “don’t waste your time,” but not all panelists agreed with that.

Sheel met with LPs who didn’t usually invest in Fund I. He ended up getting some checks from these meetings—they were small, he said, but they were “a valuable signal to other investors.” Other LPs stuck to their investment strategy, but he was able to use those meetings to stay in touch, which made it easier for them to come in at Fund II.

James said that the key is understanding how innovative the LPs are. Some endowments are leaders in certain markets—and leaders take risks because they are looking at the long term. Having conversations about your vision for Fund II and Fund III “endears them to your thought process.”

Engagement after the investment

Each panelist concluded by sharing their thoughts on platform and value creation, how they’re being a strategic partner for portcos and LPs.

Nancy’s mantra is “do no harm.” She’s skeptical about the investors’ ability to add value to a business, so her approach is “a scalable founder support model” with resources to keep founders focused on the experiments they need to run to get from seed to Series A.

Sheel spends a lot of time with his fund’s best companies. He has people on the team who help specifically with partner introductions, with press, with recruiting, and with raising.

James said that the real challenge for Black founders is they need support in different ways. He challenges their ideas on conserving money and encourages them to spend money to solve problems. From there, he helps founders with all aspects of building to help them “spend the least amount of time on stuff that doesn’t take any talent” so they can accelerate quickly.

The founder vs. investor mindset

James is still the CEO of Pilotly as well as an investor, and he sees similarities between the two. How you set up your culture and hiring process as a startup, how you build co-founder partnerships, how you scale: They’re all things you can apply to building a venture fund.

Knowledge, network, and empathy for founders and customers is also important, Nancy noted; there’s nothing like being able to understand particular spaces from actually working in them.

Sheel felt the same way: “We’re building a startup that writes checks instead of code.” But, he added, moving from a 100% focus on running one thing to getting to work with a bunch of different companies is really rewarding.

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