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So you want to be a VC? The 10 steps to setting up a fund – Part 1 Written by Pietro Bezza on 6. November 2012

Launching a VC fund is no easy task, but our guest contributor Pietro Bezza – Managing Director at new VC Connect Ventures (pictured above) – now has the experience and know-how to give you the run down on how to get started. Here are the first five of his 10 tips. Stay tuned for the second half…

Venture capitalists? They just make lots of money, right?

Starting a new company is tough, fun, and memorable. It can be rewarding too. I know these things well. I started up my first company when I was 29 years old and my second one at 39. My first company – Neo Network, now Zodiak Active, was a digital media company (video, gaming, and dating). My next company, Connect Ventures, is a venture capital fund that invests in internet and mobile early stage startups in Europe, and has been in business since January 2012.

Given my background and having started businesses on both the entrepreneurial and investor sides of the table, I felt it was natural for me to tell my experience of “starting up a new VC fund for startups” when asked to contribute to VentureVillage.
I talk a lot with entrepreneurs and other players in the startup scene and I often perceive that there is quite a lack of understanding about the nature of VC funds as businesses. They are often seen as bureaucratic financial entities that make greedy decisions based on mysterious rationales – I’d love to try to help give some insight into VCs and to add a bit of transparency to how they work.

Here’s how it works

A VC fund, as with every business, is an enterprise whose goal is to generate profits for its shareholders (investors) and its management (investment team). How? By investing capital and expertise in businesses whose value has the potential to increase significantly over a period of time.

It is about strategy development, raising funds, marketing, buying and selling businesses, general administration, and the million and one details that go into running a business every day. Finally it is all about the everyday commitment of the team to make things happen and to perform as well as they possibly can.

Hence, as all new enterprises are in their early days, a new VC fund is a “startup” itself, with all the peculiarities and challenges that early-stage businesses face.

VC firms 101 – growing businesses with the potential to increase in value over time

The 10 steps to starting a new business that we have followed…

We at Connect Ventures are committed to adopt for our own fund the same principles and approaches we believe startups we invest in should adopt.

1) Really understand your motivation, risk propensity and capabilities

This step applies for any challenge in any scope – family, sport or business – that requires long-term commitment in a very competitive environment.

  • Personally, I really wanted to get back to focusing on early-stage companies. Early-stage businesses are the most challenging, creative and exciting.
  • I wanted to re-invest and risk most of what I gained as a tech entrepreneur back into the tech ecosystem.
  • I knew I‘d be able to exploit my 15+ years of successful operational experience and network in the digital industry yet I’d have to overcome the lack of VC-specific competencies and relationships.

2) Spot a market opportunity

For me, this was an easy one. It was obvious to me – with my background as an entrepreneur, executive and angel – that there were high quality founders and startups in Europe but not enough early-stage capital to fund those ideas. Due to this funding gap, there is a big demand for smart, early-stage money provided by sector specialists and supportive investors. An untapped need in an immature market represents an opportunity.

seed fundingEarly-stage funding… Image credit: Flickr user Images_of_Money

3) Design an innovative product

There is no way for a new business to win without a novel proposition and key differentiators. We wanted to create something that addressed a need while also being complementary and innovative to the existing European VC scene, so we designed Connect Ventures to be intentionally small, vertical, pan-European, product- and team-centric.

4) Minimum Viable Product (MVP)

As the Lean Startup philosophy teaches, it is important to get fast initial customer feedback on your idea by developing and marketing a “pilot” of your final product, thus not wasting time and money on unnecessary and unproven activities. At Connect Ventures, our customers are the entrepreneurs we would like to fund. Therefore our value proposition was tested primarily within the startup ecosystem. What I did was:

  • Participate in a variety of startup programs and accelerators, helping them as mentors
  • Work as an active advisor to several startups
  • Participate as an angel in seed rounds in syndication with other venture capital funds

Pietro BezzaPietro Bezza (right) – Image credit: iPressLive

Through these activities, I succeeded at networking with a great number of excellent entrepreneurs and new startups. Personally, I learned the support I can provide was relevant for entrepreneurs and other early-stage investors. When Bill and Sitar joined me, given their past track record and experience, it was the best validation I could get.

Then we started talking to potential fund investors to see how they reacted to our fund idea. We got some encouraging responses and good advice about how to improve the proposition. Some of the best feedback we got was from potential investors who told us they wouldn’t invest in our fund. Though maybe disappointing, they didn’t stop us and helped us make our proposition even better.

5) Find great complementary-skilled co-founders

People. They are the most crucial step. For many reasons:

  • Whilst one single head is the best governance option in a corporation, making investment decisions calls for a joint dialectical analysis and process.
  • To become successful VCs, as we intend to do, requires a large set of skills, backgrounds and networks. It is hard to find all of these in a single person.
  • We invest in people (the entrepreneurs). Our fund’s investors invest in people as well (fund managers aka us) and, like everyone, they look for really great teams.
  • We do want to provide our portfolio companies with as much support as possible so we need the best skills and sufficient bandwidth as a team.

In addition to the invaluable support of Nicola Drago as Venture Partner, I wanted to find full-time co-founders. First I talked to Bill Earner, who had left Amadeus Capital and was interested in setting up a fund based on the same assumptions I had. We decided to join forces. Then we spoke to Sitar Teli, whom we have known for a couple of years. She wanted to start as an entrepreneur in the field that she is passionate and excellent in: venture capital investing. Connect Ventures was a perfect match for the fund she has in mind. So we had the third musketeer!

In Part 2, Bezza covers; setting up an investment thesis, fund structure and raising funds.

Image credit: Flickr user uralgold

For related reading, check out:

So you want to be a VC? The 10 steps to setting up a fund – part 2
Investor spotlight: Christof Wittig on why “the average venture partnership lasts longer than the average marriage”
Investor spotlight: Earlybird’s Ciaran O’Leary talks Berlin hype and tough decisions