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What you do now determines whether institutions will ever invest in you
The Long Game You Might Not Be Playing
Most Fund I managers won't get institutional LP money. That's just reality. Less than 3% of new funds do.
But here's what many managers miss: what you do in Fund I directly determines whether institutional LPs will ever invest in you. Fund III. Fund IV. Fund V.
"All of this stuff is easily discoverable when you do due diligence on a firm and a fund," says Adeo Ressi, founder of VC Lab. "One day you'll be in late due diligence and they'll say, 'Sorry, we can't invest right now. We're overallocated.' They'll never tell you why, but it's because of one of these things."
Here are the five mistakes that will disqualify you.
Mistake 1: Skipping KYC/AML on Your Investors
"They're all my friends. I don't need to do KYC/AML."
Wrong. Legally, you do. Even if they're your friends. Even if you've known them for 20 years.
When an institutional LP runs due diligence on your fund, they will check whether you followed proper Know Your Customer and Anti-Money Laundering procedures. If you didn't, you're done.
Mistake 2: Not Clearing Conflicts of Interest
Are you a venture partner at another fund while running your own? Did you disclose that to your LPs?
Many managers don't think this matters. It does. Undisclosed conflicts of interest are a red flag that institutional LPs will not overlook.
"I'm a venture partner in another fund while I'm running this fund and I never told my LPs," Ressi shares as a common example. "All right, we got to clean it up."
Mistake 3: Breaking General Solicitation Rules
If your fund is a 506(b), you cannot publicly talk about your fundraise before you close.
This means no LinkedIn posts about raising your fund. No media interviews discussing your fundraise. No public pitches.
"You publicly talk about the fund before you're closed and you break general solicitation rules," Ressi explains. Institutional LPs will find the media articles. They will check the dates. They will pass.
Mistake 4: Bringing in European LPs Without Proper Licensing
Europe has strict regulations around fund managers soliciting investors. If you brought in European LPs without proper licensing, you've created a compliance problem that institutional investors will discover.
Mistake 5: Improper Capital Calls
"I did variable capital calls. I called 100% of capital and I spent it."
Capital call procedures matter. How you handle LP money matters. Sloppy fund administration in Fund I signals to institutional LPs that you're not ready to manage their capital.
The Good News: Most Mistakes Are Fixable
Here's what many managers don't realize: you can fix most of these mistakes.
In Emerging Institute, Ressi notes that the first four to six weeks with many Fund II and Fund III managers involves cleaning up errors from Fund I.
"I don't want to make it seem like every mistake that you make, conscious or unconscious, is not fixable," Ressi says. "You can fix these things. And I think you get a lot of forgiveness points if you have fixed them."
Run KYC/AML on everyone retroactively. Disclose conflicts of interest now. Get your documentation in order.
The key is to identify and fix mistakes before you're in late-stage diligence with an institutional LP. By then, it's too late.
The Bottom Line
You're building a firm, not just a fund. What you do in Fund I follows you forever.
Do it right the first time. And if you didn't, fix it now.
The institutional LPs you want in Fund III are already watching what you do in Fund I. Act accordingly.