How to start a VC fund

All venture capital firms sell the same product: financial returns to LPs. GPs take LP money to buy shares in promising startups at a low price and then sell those shares later at a higher price. I run a successful VC fund with Jake Paul (Anti Fund), and I’ll summarize my learnings here so you can start your own VC fund.

GPs market themselves by demonstrating differentiation across three dimensions:

1. dealflow i.e. seeing the right deals
2. taste i.e. knowing what you see
3. access i.e. winning once you know it

Dealflow is VC jargon for having friends who will tell you about a deal. VC’s obsess over their dealflow and their pipeline of prospective investments because they can’t invest in something if they never saw it. Your dealflow pipeline can be as simple as your list of your smartest college friends to your list of OpenAI and Deepmind researcher friends who are about to quit and start the next big AI company. Second order, your dealflow system can be your shortlist of industry friends who tell you about their best deals. And this cascades on and on and can be arbitrarily sophisticated.

The people with the best dealflow are the people who have a lot of friends who feed them the most complete coverage of insider moves. In this game, you have to give in order to receive, so you also have to feed your own information into the system. Otherwise, you’ll be detected as a value extractor, and be shunned. The best create a virtuous flywheel where they receive the most complete information to make the best deals and, of course, they tap their best information sources back on their best deals, which results in everyone making a lot of money together, rinse and repeat.

Investment taste boils down to market and technical information flow x pattern matching x strategy. At the earliest stages, this means you can predict what the future looks like in a market, have a good feel for team, product, and go-to-market, and have a disciplined buy-sell approach. In practice, this means you have a high slugging percentage for betting on the right founders at the right time with the right solution for an exponentially growing or already massive problem (i.e. market). There are less than 100 people (and probably closer to 10) with impeccable founder taste, and the elite Silicon Valley tech and VC circles all know who those people are. I won’t list them here, but these are the people that once they lead a round, people will immediately pre-empt the next round at 2x the price.

At later stages when there is demonstrable traction, the game turns into how much to pay or overpay. There are standard multiples and metrics to underwrite every business. Any kid who’s read the same SaaS and VC blogs can tell you that 10x revenue multiple is how best in class SaaS trades, and you can go down the list of each industry and sector and ask ChatGPT on how assets trade (and then you might discover that some assets trade on EBITDA. What’s that?). In financial job terms, this is the copy-paste boilerplate in the “comps” section of an IC memo. The only hard part of this game is how much to overpay for the asset. Assuming that the asset is good, there will likely be multiple GPs looking at it and 95% of the time, you win the deal by paying the highest price. Historically, the very best companies are always expensive at each round, so it’s OK to overpay now if it’s cheap later. But if you pay gold prices for pyrite, you’re cooked.

Most can’t tell the difference, but the elite tastemakers can, and they set industry consensus. Everyone else will chase those same names or variations and fast-follows thereof. About 10% of VC’s have some taste, and the other 90% are momentum chasers or sheep. This is fine and expected behavior because elite S-tier sheep actually make a lot of money. In fact, many of the people on the Midas List and managing billions of dollars are S-tier sheep.

So what differentiates S-tier sheep and mere ordinary sheep? Access.

Everyone has an opinion on why they think X or Y startup is the next trillion dollar company. But none of that matters because they cannot access and execute on their assessment. Consensus hot deals close very quickly, get bid up on price, and you will not be let on the cap table as a nobody. Your ability to gain access is therefore not investment acumen, but purely the sum-product of your brand/reputation, your network of other branded investors who’ll vouch for you into their deals, how much and how fast you can wire, and your value-add services to help the company. Value-add services are least important and mostly for fund marketing purposes because the very best companies don’t need it. They just want your money. The S-tier sheep fire hundreds of millions of dollars into the consensus best companies in the world, and they’ll make more money than smarter, smaller players by sheer quantum of capital deployed. This is a fun position to be in because your size dictates the market, but if you fuck up, you’ll be the industry schadenfreude for the week.

So how do you start a VC fund? In my estimation, fundraising for a new fund is akin to but slightly harder than raising money for a new startup.

For a startup, your job is to make money by selling product, so the very best startups control their own destiny by generating revenues and profit. Everyone can tell pretty quickly if a business is working or not. You making money and growing or are you a cash burning fire pit? For a new fund, there is no obvious measure of skill or progression because the money is locked up for 10 years and it takes a few years to see a portfolio take shape.

Raising a fund is the highest class of begging. Essentially, you’re begging multi-millionaires and billionaires to give you money so you can manage their money better than they can themselves. Your product is literally a decade-long IOU. Furthermore, LPs, whether private family offices or institutionals, are very sophisticated. They travel the world to 5-star luxury hotels to hear the sales pitches of the most successful billionaire celebrity GPs in the world. These events are called AGMs. Sophisticated LPs know everyone’s numbers and have heard everyone’s pitch on why they have good dealflow, taste, and access. These are some of the greatest shows on Earth as billions of dollars are allocated based on these AGMs and the associated backroom deal cutting.

Paradoxically, while LPs love these mega AGMs, they also know that the performance of mega-funds attrit down proportionally to fund size. The best GPs make being their LPs the coolest club in town. Don’t underestimate the value of being cool, especially in the context where rich people can buy most things. One of the few things that’s hard to buy is cool.

So LPs are actually looking for the next superstar GPs as that's where alpha is. So to raise a fund, you simply need to reverse-engineer the solution: your pitch needs to make LPs look like a genius for backing you early.

My personal hard won lessons you can use to start your fund:

1. Seeing the right deals i.e. repeatable and durable dealflow:

You can get lucky investing in 1 or 2 unicorn startups. But the hard part is how do you consistently generate this pipeline, and how do you add durability to it. For example, many junior VCs get hired because they are alums of the hot company of the era: this is currently OpenAI, but previously this could be Stripe, Uber, Facebook, etc. Others get hired because they have built a successful business, and the idea is that you therefore should have a network of other successful founders you can draw from. And others get hired because they are socialites in flow with the right mix of founders and investors.

These networks let you start seeing the right set of deals, but they will go dry within 2-4 years. So you need to develop a system to stay relevant for the next generation of top founders. This is why many VCs are now podcasters and content creators. This is a reasonable strategy to stay top of mind for their prospects. We take this to its natural limit with Anti Fund. My partner Jake Paul is a global superstar and we marshal that attention into venture investments. In other words, the top investors are turning into top content creators e.g. All-in Podcast, Bill Ackman, Marc & Ben, 20VC, Brad Gerstner & Bill Gurley podcast, etc. Why not the inverse, and run the experiment to see if top content creators can turn into top investors? Anti Fund is the n=1 proof of existence.

I’ve been in the startup game for my entire career and have traded a lot of favors back and forth. I was top of class and well-regarded in the Stanford computer science program and my homies are now GPs at top funds and founders/C-level/VP-level leaders at many of the top tech companies in the world. Be smart and high-integrity and make smart and high-integrity friends. Help them out in whatever way you can (e.g. I’ve helped a number of friends negotiate deca-million dollar C-level/VP-level comp packages at the elite AI/tech companies), pay it forward with your own unique experience set, and be a good human and it really does come back around.

2. Knowing what you see i.e. taste:

Novice investors haven’t made enough mistakes to know which deals feel right. Taking a lot of reps is the only way to develop taste. I can try to describe what abalone tastes like, but it is only vicarious. You have to eat one to taste it. Write a ton of micro angel checks, expect to lose money, and hopefully luckball into some good ones. As a novice angel investor, I personally luckballed into the first round of companies like Ramp and Chronosphere.

If you don’t have money to lose on angel investments, try to accelerate taste development by proxy. You can first try to work at, consult for, or even do free work for the best possible companies you see. Alternatively, you can try to give VCs free leads. The smart VCs who see you have a penchant for this might give you a job or give you some carry for sourcing a good deal.

One hard-won lesson is understanding why you’re seeing a deal. Be self-aware that you’re facing a death wall of adverse selection as a noob. Just because you’re successful as a PE investor or a startup operator does not mean you know what you’re doing as a VC. Another pro tip is to avoid bridge rounds and weird, in-between rounds “strategic” rounds. They’re usually much more complex and tricky than they’re worth. And lastly, be really clear and self-aware on how to self-disambiguate supporting a friend versus making a sound investment decision. I love investing in my friends, and my best deals are from friends. But sometimes, your friend just might be running a shitty business.

3. Winning once you see it i.e. access:

Seeing and identifying something as good is meaningless if you can’t get your money in. Most of the rounds you see announced are closed months back, so you have to see things early and win fast.

Most VC’s are actually pretty lazy, so you can win if you show up in person and add immediate value by solving a problem for the founder. Another reasonable approach is out-begging everyone else and/or overpaying everyone else. This is not ideal because it’s a bit shameless, but shamelessness wins surprisingly often. The best way is to earn a cracked reputation and getting founders to believe it’s an honor to take your money. A cracked reputation necessarily implies being a winner, which boils down to outworking everyone else and adding more value to the company than anyone else.

Winning can be achieved in many ways. It doesn’t have to be straight value-add to the business like bringing customers or bringing co-investors. It can be platforming founders on the popular tech podcast you run or offering unique experiences like a ride on the PJ, ringside fight tickets, DJ booth at the club, or the super-exclusive retreat at a 7-star resort or even better your own private ranch. These all often work better than the dime-a-dozen “I will make introductions” which is what everyone offers.

4. Get money i.e. be rich:

VC is a game for rich people. It helps a lot if you have a lot of money yourself or you have family members or best friends who will give you a lot of money to start. About half of new GPs are bankrolled by family directly or via introductions, and the other half are killers who clawed their way up the capital ladder through IQ, grit, and resilience. It’s actually hard to tell which is which at the very top levels as I’ve seen rich kids crush, geniuses fail and vice versa. I have no moral judgement on this; this is simply the reality of the industry. Venture capital is the game of spending money to make more money, so you have to have it or be close to it to start.

Good luck. If this is helpful for your journey as a VC, thank me by giving me allocation into your best deals.