Many factors contribute to an individual’s decision to pursue venture capital funds on their own. Higher salary, more independence, and the chance to build a name for yourself they want to specialize all contribute to the search for a new job. The fact that it’s possible doesn’t make it simple or inexpensive, either. Especially in the current market, first-time venture capitalists need to impress potential limited partners with a strong track record and a compelling pitch. They will also require money.
I recently interviewed Haris Khurshid, who earlier this year established Chalo Ventures and two months ago closed a $50 million fund to invest in early-stage Pakistani startups, in order to gain insight into the process of establishing one’s own fund, including the factors to be considered and the associated costs.
Here is some advice for new general practitioners:
Paperwork For the Law
An initial warning: legal fees can quickly add up.
According to Khurshid, “that’s one of the highest kinds of charges,” with prices ranging from $51,000 to $100,500 on average. However, this will be contingent on the investor and the caliber of the law firm they hire. When Khurshid established a hedge fund a few years ago, he wrote most of the necessary paperwork himself and then had it reviewed by an attorney. Khurshid spent around $12,000 to set up his personal money properly.
Legal representation, albeit it may be costly, is essential. Some of the required paperwork to get things rolling is listed below:
- What Is a Private Placement Memorandum (PPM)? This is a very detailed document that describes the fund’s objectives, management, investment focus, risks, disclosure, fund structure, etc. As Khurshid puts it, “it’s extremely, very lengthy.”
- An investor questionnaire, inquires as to the LP’s risk tolerance and accreditation status, among other things.
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Investing Some Time
Among the many expenses associated with a new fund’s inception is the passage of time. It took Khurshid around two and a half months, he adds, to complete the necessary paperwork and establish the fund. So, he started pitching investors even while he was putting the paperwork together.
“Ask yourself: Do I really need it? Or am I better off investing a lot of it in startups,” Khurshid says.
.@theorycraft_inc Raises $50M to Maintain Long-Term Focus on Talent and Game. #vc #startups https://t.co/xw7XRn2hfk via @VCNewsDaily https://t.co/xnzxDySHnA
— Venture Funding News (@VCNewsDaily) September 22, 2022
Start-Up Costs
GPs should give some thought to whether or not they will need to travel to meet with LPs or sit down with entrepreneurs for those initial investments. In such a case, investors will need to factor those expenses into the rollout of the fund. As an investor in Pakistani businesses, Khurshid incurs significant travel costs due to his frequent trips to the Middle East.
As a result of the hefty initial investment, doctors may be tempted to charge excessively for Fund 1. Khurshid cautions that fees reduce the amount available to invest and produce returns for LPs. For instance, a fund that manages $50,000,000 and charges a 2% fee will keep $1,000,000 in uninvested capital.
Porsche Prices
This year’s IPO market has been unusually quiet, therefore Volkswagen Group’s listing of Porsche is welcome. Porsche listed its shares in Frankfurt, Germany this morning at a price of €82.50 ($80.23) per share, the upper end of its price range.
Following its first public offering, Porsche became the world’s fifth-largest automaker. The listing is good news for the IPO market, but it’s unlikely that the whole market will improve anytime soon.
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