When Should You Launch Your Second Fund?

Alright, what's up guys? In this video, we're going to talk about when it's time to start that second fund, that third fund, that fourth or fifth or sixth, whatever fund you're on. Like, when is the right time to do that and how it changes for different types of funds? Let's get into it. So first and foremost, a lot of people come to me and they're like, Lincoln, like right off the bat, like I want to start this real estate fund, this assisted living fund, this You know, all these different types of funds. And I'm like, look, you're most likely to succeed if you start with one asset. And we say that all the time, but you really are. It's easier to sell. It just makes everything make more sense. But assuming that you've done that, then you can, you know, move on to second funds. So let's take real estate first. So the typical lifecycle of a fund, right, is you kind of raise some money in this period. Real estate is anywhere from 3 5, 7, longest 10 years. I would say normal is probably 7. But you have 3 main phases in a fund. You kind of have your acquisitions, you have a value-add, and then you kind of have a dispositions phase, right? There's a couple of things to think about of when you want to launch a different fund. Like, I would think about it like honestly starting a business, right? When you start a business, you usually don't start with, you know, 10 different products. I mean, you might, but usually you just try and have a flag— that's why there's such thing as a flagship product, right? It's kind of your leading product. So a lot of funds will actually call their first fund a flagship fund. So with real estate, this would be fund 1, right? You, you kind of run it. As soon as you're done, like ideally, if you're, if you want to repeat this same type of fund, so let's say this is a multifamily fund. As soon as you are done with that acquisitions phase, you're going to go and you're going to start on fund number 2. And there's a couple of reasons being here. So I know you're lean, like when you're starting out, you're like, how can I start another fund? But eventually you're going to have teams over each one of these Subsectors, right? You should at least. And, you know, you want to keep your acquisitions team busy at all times. And so as soon as you stop fundraising for fund 1 and you close, you start fundraising for fund 2. And that acquisitions period in real estate is usually like, what, 2 to 3 years? So then you start your second fund on the same year, and that's especially for the same type of asset. You can launch different products the same way as well. So oftentimes funds will be called products. So you have several different product offerings to your investors, different types of funds. Depending on their needs and their objectives, so on and so forth. So, and then you're going to do the same thing. Just keep going, keep going on and keep growing. And then if you have some new subsets that you want to launch, you can do that too. But first of all, the most important thing is that you establish yourself as an expert at something. And then as long as you— I say this, I've said this before, I say it a lot. As long as your capital meets your capacity. So if you have the demand, if you have investors just saying, please take my money, then yeah, launch new products, have new different types of funds. But You don't really want to bring them 5 and not be able to complete, you know, finish your target raise on any of them. So with, with like an acquisitions, you're never going to want to have another real estate fund. It's not ideal that does like, that has the exact same investment mandate. Why? Because the investors in this fund and the investors in this fund, there's kind of a conflict of interest there of which one's proprietary, right? Which one gets the better deals. So, um, you don't want to have like the same type of fund going on at the same time. You can have different products that you launch. Say it's a different product, you launch it at the exact same time. And you know, that's okay if you have the demand. When you're, when you're giving a platform of products to your investors and you're saying, you know, here's what you can choose from, there's kind of 2 main fundamentals, at least in real estate. There's kind of a growth-oriented fund where you're just trying to increase that IRR as much as possible. And then there's sometimes an income-related. These are kind of the 2 main types of funds that people would start. And this one is more focused on rents and paying out more frequent distributions, offering, you know, more liquidity to investors. That's kind of real estate in a nutshell. When, I mean, when is it a good time? Like this is ideal. And then you, I mean, if you have the capacity to launch new products and new funds, you just follow the same formula of when you launch like the second fund under that same product set. But yeah, that's, that's, so that's real estate. So venture and private equity. So venture is usually simple. It's very simple. It looks just like, like just with real estate, except you usually don't have different products. I mean, if you're some behemoth like Sequoia, yeah, you might focus on like Series A or something like that. Or, you know, later down the road, you might get into different sectors. Maybe one focuses on AI and tech fund, and the other one's like education or ESG fund or something like that. You can launch different products, but most venture funds don't do that until you've like followed one product and had several funds under the same investment thesis, like 5 or 10 times, right? If like, If that market opportunity is dissolving, that's when you would want to start exploring new product sets. So, and private equity is very similar, traditionally follows the same path. Usually in private equity, you'll come in with like, hey, this is our strategy, these are the types of companies we like, these are our objectives. You usually follow the same product line for a while. You don't usually start new ones. And something to remember, like if you are wanting to start new funds, like you're gonna have your GP and your LP, You know, if you're starting a new fund, like this general partner could be the same. So this, this general partner could be the same general partnership for Fund 1 and Fund 2 and Fund 3 under the same partnership. But usually if you have a different product set, then you're going to have a whole different GP. And you can have different GPs for each of these if you want. It's usually not super common, but you can. And the reason you have a complete new one is usually, I mean, this is a whole different sector. You're going to like, you're going to have a whole different acquisitions team, you know, a whole different development team, maybe a different money raising team. And as such, you don't want the partners, you don't want the partners that just do assisted living to be a part of your multifamily fund or, you know, vice versa. You don't want your fintech guys to be a part of your whatever Series A guys for venture. Now we always need to address the, you know, cause there's vast stark differences between, you know, an open and closed-ended vehicles. So hedge funds, and I put CC for crypto-related funds, These are open-ended vehicles. So in reality, you start one, right? And then you run it ideally in perpetuity. You're just going to be trading that asset and you're going to be growing your AUM until either you're fully subscribed or, you know, your investors leave or, you know, whatever happens. But that's the goal. Obviously, that doesn't happen. Hedge funds fail. People will often come to me and say, well, should I start? When should I start a second hedge fund? It's kind of the same ideology, same thought process here. If you have the demand, if this fund, let's call this first First fund, you know, $10 million. Let's say you wanted to do it small, but then you go and you start raising money and you oversubscribe because usually you're going to have a max and you end up with $20 million in this fund and you just have so much demand for this product and you could easily raise $20 more. Sure. Introduce an entirely different product, but it should have a different investment mandate. Like just the objectives of the fund should be different. Again, I do encourage you just start with one. Start with one product, one thesis, one strategy, and grow that. And once you're successful, you can start down, you know, introducing different products. Got to listen to your investors. And there's the same type, right? There's kind of a more usually a growth and an income for hedge funds. You know, if you're, if you can collect premiums on options in one and the other, you're going to shoot the moon. Great. Like, you know, but outline that in your investment thesis and listen to your investors. What is the market asking? Asking for. Anytime an investor does not elect to allocate with you, you better leave that conversation knowing why and if there's anything you could do about it. If it's a different mandate, if there's a different— like if someone would be more interested in a different type of strategy or whatever it is, understand that. But yeah, it's totally up to you of when to start your next funds. There's a lot of strategy that needs to go into it. And I'm excited to work with you guys on getting these, you know, Fund 4 and Fund 6 and Fund 10 So hopefully, hopefully that was helpful. Have a good one.