There’s a growing trove of info to help startups raise their rounds but if you’re looking to raise a venture fund, the advice is pretty sparse. Now that we’ve publicly announced Homebrew, I’m able to share some of the details which went into its creation. My goals are threefold:

1. Pay it forward being transparent  for future first-time fund managers
   
2. Close the investor < > entrepreneur perception gap – Satya and I believe Homebrew is a startup which writes checks instead of code. You can see our fundraising experience wasn’t that different than two startup founders might have.
   
3. Journal it for myself
   

To begin, here’s a short summary and timeline.

• January 2013: Homebrew starts fundraising from institutional LPs
  
• February 2013: Fundraising leaks via Fortune (yes, potential investors blab to press)
  
• March 2013: First lead institutional commitment is secured
  
• April 2013: We agree to terms with three other institutional LPs, several smaller LPs and a few individuals to round out the fund. The four lead institutions contributed ~92% of the fund and the other investors rounded out the total.
  

With that context let’s cover (a) how to find fund investors, (b) why we got to “yes” and (c) what a “no” looks like.

How to Find Fund Investors

While there are plenty of sources of money (individuals/family offices, strategics, venture funds being three of the most common), we hoped to build Homebrew’s base with top institutional investors (fund of funds, foundations, endowments). Institutional LPs were desirable for Homebrew because of their goal to build a longterm platform with us across multiple funds, their ability to bring additional capital to bear in special situations and their broad perspective on the marketplace.

In general finding fund investors – esp institutional LPs – is more difficult than identifying startup investors – there’s no AngelList equivalent and these investors don’t blog or have websites with detailed information about their firms and investment strategies. We were fortunate to have some existing relationships via Satya’s time at Battery Ventures but what really helped were warm introductions from other early stage funds.

So what did our funnel look like?

• ~40 initial emails all via warm intro to investors familiar with early stage tech
  
• ~20 of which converted into phone calls or meetings
  
• 10 of those 20 turned into multiple conversations
  
• 5 said yes within our timeframe, of which four became part of the fund
  

Startup Lessons

• Don’t pitch strangers -> introductions to investors from their existing portfolio is best
  
• Research their current portfolios and biases
  
• It’s always mutual -> ask questions to qualify fit, interest
  
• Your pitch might leak to press so decide beforehand what to do if it becomes public
  

Why We Got to Yes

One thing you can’t control in fundraising is perception of your marketspace. The success of first generation early stage firms was of great benefit in raising Homebrew. If folks like Baseline, Harrison Metal, Floodgate, Lowercase, First Round, Freestyle, SoftTech, Felicis, K9 and others hadn’t shown early success it would have been much more difficult. Ok, enough about them, let’s go back to patting ourselves on the back 😉

In hindsight there were three questions our investors needed to get comfortable with in order to commit.

1. Can these guys be great professional investors?
   
2. WIll entrepreneurs and co-investors want to work with them?
   
3. How strong is their partnership?
   

We had the benefit of Satya’s Battery track record to establish credibility on our quality of professional investing. My angel track record was less extensive and also monetary return wasn’t always the primary goal (although with a relatively young portfolio it looks like I’m at 2.75x). One potential LP asked me my rationale behind a 2010 angel investment. I told him the truth: that I was friends with the founder, we were drinking together and Google stock had gone up like $10 that day so I was feeling flush.

What we also had was a point of view as to where we’d be investing: the Bottom Up Economy. This set us apart from other funds with broader or non-descriptive investment principles. We also had given extensive thought to our portfolio construction strategy around playing lead roles in rounds, the number of deals we would do each year, how much capital we’d hold back for follow-on, etc. The combination of these two meant that a fund could see how we’d be differentiated in the marketplace and where we’d fit against their current exposure.

As the LPs sought to learn more about us it became clear they spelled Due Diligence as DO DILIGENCE. Each investor went extensively into our backgrounds and asked around about us quite a bit. Having the trust of the investing and startup community was essential and we were thrilled that our references came back so positive.

Finally there were a number of questions about the partnership. How well do we work together? How do we reconcile disagreements? Did we have the same vision for Homebrew? Would we be dividing work in any specific way? I think Satya even got asked what my favorite food was (not kidding). As with any relationship which has formed over the greater part of a decade, we sought to convey not just current synchronicity but having something dynamic and strong enough to spend many years building Homebrew together. As I told every investor, I wouldn’t be doing this with anyone but Satya. It wasn’t a line, just the plain truth, and I’ve gotta believe it resonated.

Startup Lessons

• Investor perception of your marketspace matters
  
• Don’t be afraid to have a strong point of view
  
• Team, team, team
  
• Play the long game in building relationships, helping others

Anatomy of a “No”

We accomplished what we had hoped during our fundraising but certainly had our share of rejection as well. The rejections can be classified into three buckets

1. Process Issues Largely Out of Our Control – Fund of funds that were between their own fundraising cycles and thus had no more money to invest; institutions in the midst of reviewing their VC allocations vis a vis other private equity sectors; our process moving too quickly; their check size being larger than our entire fund!
   
2. Satya is a Good Investor, Hunter We Don’t Know Yet – This was totally fair given my smaller history. My answer was always “look how I voted with my time, not just my dollars,” being very willing to stand on my operational track record. For some this was fine but others didn’t want to bet on me yet (the ole’ “let’s build a relationship”). One investor even commended me on my ability to “prevent losses” in my angel portfolio which I think is like saying “he has a nice personality.”
   
3. We Don’t Buy Your Thesis and/or Your Ability to Execute Against It – We only had a couple of these rejections and to be honest, that was fine because not everyone is going to see the world the same way. I would worry if every investor nodded enthusiastically at us. I want some smart people to challenge our assumptions. It makes us think about their feedback, refine our thinking and charge ahead. To these potential LPs I’ll only say, maybe we’ll let you into Fund 2 🙂
   

Startup Lessons

• Expect to hear No
  
• Practice objection handling – what are the common concerns you hear and how to counter
  
• Today’s rejections could be tomorrow’s investors so make sure to honor the time together and stay in touch
  

The Road Ahead

Whew, this had been pent up inside me for a while, waiting until we put up the website. Although we’re “done” with fundraising for Fund I, building relationships with investors is an ongoing responsibility for founders. Besides advisory board calls and LP letters to our current group, we intend to stay in touch with the other investors we met over the first half of the year. Whether for future funds or to just share market data, it never hurts to follow the money. Looking forward to taking the journey and sharing as much as we can with you.