Starting a VC Fund, Episode 14: Service Providers for VCs

Hi there. I'm Patrick Evers. I'm the founder and CEO of MindMaven, a executive coaching firm that helps leaders save about a full day of work in a week and then use that time to invest into relationships. And here we have.

I'm Charles Hudson, managing partner of Precursor Ventures. We invest in founders at the earliest stage possible.

So today we have a very special topic we wanted to talk about what service providers you actually need if you are basically starting to run your first fund. And so, Charles, the question for you is what are some of the first considerations that one should have when thinking about this?

You know, I think it's worth noting one thing. When I first got started at Precursor, I asked a few of my mentors what are things I should think about when we're choosing service providers. And one, the first thing they reminded me, and I remind everyone else of this as well, is for some of your core decisions around service providers, whether it's the legal firm that's going to do your fund formation, the team that's going to do your tax and audit work, in many cases those are fund level expenses. And what that means is the management company doesn't bear that expense, so you don't have to think about, wow, how am I going to afford this? Out of management fees. Those are essentially fees that your limited partners pay for as part of the fund. And so don't let the sort of cost of hiring really good.

Service providers for your fund be intimidating when you're looking at a potentially small management fee pool. These are going to come out of your fund itself. Now remember the fund level expenses, they cut into the capital that you have available to work with, but they're not going to touch management fees. So number one, think first and foremost about finding quality, appropriate service providers for your fund, given your strategy and size. And second part of these decisions, it's not just about what you need, it's about what's going to make life easy for your limited partners. Remember, they have reporting obligations of their own. And if you've got limited partners that really need you to use a big international tax firm for their own reasons, that's something you should take into account. It's not something we did in the early days of Precursor. We work with a really great tax and accounting firm, but they're not one of the sort of nationally known big firms. But they do great work for us. And so we tried to strike a balance between service providers where I got great information and referrals and references from other funds of my size and Also making sure we could hit the quality bar that I thought was appropriate for our fund.

Okay, awesome. So walk us through. What are the key service providers and what decisions do you do with with them?

I think one of the big ones you make first is who you want to work with on the legal side for fund formation. Now, one thing I will say is VC fund formation is what I would describe as kind of a specialty boutique practice. There's a handful of firms that do a lot of VC fund formation. And working with the fund formation team that does a lot of VC work has two advantages for you as a fund manager. First, that legal firm will have a pretty good sense of market terms because they're working with lots of other GPS to get funds started. So if you've got questions and you get pushback on things, they can give you some sense of what they're seeing in the market. And second, the LPs who are going to review your docs are used to seeing the docs from a fairly small handful of firms. And if you're working with one of those firms, there's a good chance that the output that they provide you in terms of fund formation docs will be in line with what LPs are used to seeing. And so it's a great simplifier on both sides. If you work with a firm that has an established practice in fund formation, not that other firms can't do a great job for you, it just, it's one less thing to worry about.

All right, so basically work with somebody has a decent amount of experience and maybe even history in this space. All right, what's next?

I think the second probably most critical decision that you make is around who's going to do your fund administration and back office for your fund. And again, there's a wide variety of price points. You can choose sort of really expensive top tier providers. And there are other people that I would describe are up and comers on the fund administration side. Again, remember, your fund administrator is going to be the principal point of interface that your limited partners have with your fund. Once you're up and running.

Your fund admin is going to issue the capital calls that are going to be the people who are responsible for issuing, issuing your quarterly schedule of investments and your quarterly financials. They're going to be a pretty integral part of your operations. So pick a firm that can handle your volume and strategy and also one that's of a quality tier that your limited partners will respect.

So basically they are interfacing with a constituency that is Actually very important to you. And you want to make sure that the experiences that these people, the LPs have is going to, you know, represent the type of firm you want to run.

Absolutely.

All right, let's move on.

I think the next thing I, I, I decided, you know, if you think about an order, you need the legal docs to get the fund done, you need the fund administration to get the LPs on board and up and running. Then you need a place to take the money. So you need a banking partner for yourself. So a couple things I thought about when we were choosing a banking partner for precursors. One, I wanted a banking partner that has lots of VC clients that would understand the needs of me as a GP and precursor as a fund. And there's a relatively small number of banking providers who work with VCs in large numbers, so that pool of firms is pretty small. Second, in addition to sort of holding our money, I wanted a banking partner who could provide us with other related products. So for example, many venture funds use what's called the capital call line of credit. So you know, when you set up your fund you issue a capital call. Normally you give your limited partners some amount of time, one to two weeks from receipt to wire that money in. Sometimes you have investments that are going to close before the funds are due from the capital call and you want a way to sort of smooth that out. Capital call line of credit is great for that. Depending on where you are in your own sort of personal circumstances, you might also need.

Basically a GP capital line. So you know you're going to also have to make capital commitments alongside your LPs as you make capital calls. Sometimes you might want to use a, basically a credit line yourself to smooth that out and you know, use the credit line to make the GP commit and then pay it back as the fund pays you back. So I wanted to work with firms and only with firms that understood the unique financial needs of venture firms and the people who run them. And I'd highly encourage people to do the same.

All right, cool. Let's, let's talk about the next group, the most exciting of all.

I think it doesn't maybe sound exciting, but it will have a huge impact on your life as the gp. That's who you choose for tax and audit. And there's a wide range of really great providers from sort of the internationally well known big firms to really talented regional players. Again, I think on tax and audit it comes down to a couple things. How complex is your firm? Are you doing a Ton of international transactions. Are you doing some strange exotic things? Are you mostly doing straight down the fairway venture deals? I'm really happy with the firm that we chose. We've worked with the same firm on tax and audit from the very beginning and they've done a really great job for us. And I basically asked around for other gps of my size and stage who they were using for tax and audit and went with a firm that was highly recommended by my peers.

Okay, awesome. And then the only other one that I can think of is basically those folks that actually helps you get deals done. Do you got some words for them?

Yeah. One other thing is, you know, we use.

A deal firm so we have our fund formation attorneys. They principally work on setting up the fund. It's a specialty practice and I'm willing to pay a premium for that. We also have this other bucket of activities that I would just describe as the regular transactional stuff. You know, you need to get a convertible note or a safe or a priced round done. I went for what I would describe as a boutique law firm that really specializes in doing venture deals because they were, I thought, a better price to value trade off than some of the really big firms we use. So I would also just say find a law firm that can represent you in your deals with startups and again, pick a firm that does a lot of legal work for venture funds and startups and have someone that you can work with closely on all your deal stuff.

Yeah. So basically saying you don't necessarily have to go with the big ones. You can work with the boutique fund. But when you look for a boutique, make sure they have frequency. They are doing a lot of deals so that they are staying fresh and aware of what's happening in the marketplace. Good. This is fantastic. That's all we had. Now some of you guys might wondered, why did Charles not actually say any names in this entire video? We did this on purpose because.

Because things change. Because, you know, you could say one or the other and it doesn't mean that just because of what Charles says that that's the right one for you. But Charles, is it fair that if anybody watching this video and they want to hear your advice on who to go to, that you'd be more than happy to share your personal experience in any kind of email interaction or something?

Absolutely.

Alright, good. So there you go. You're going to get the answers that way. Thanks for listening and bye.

See ya.

Bye.