At Seraf, we believe in the power of shared knowledge and diverse perspectives in the realm of early-stage investing. To foster this exchange, we periodically invite guest authors to contribute their unique insights, experiences, and opinions on the intricacies of the investment landscape.
Today, we are pleased to feature Zain Jaffer, an accomplished entrepreneur and investor who is actively involved in a range of initiatives, including real estate, technology start-ups, and private equity through his family office, Zain Ventures. In addition to his investment endeavors, Zain is dedicated to supporting underrepresented causes and underserved communities through the Zain Jaffer Foundation. Here is his take on the fundamental concepts of becoming a fund manager:
While many entrepreneurs and investors dream of running a VC fund, few realize how dramatically different the role of a General Partner (GP) is from that of a Limited Partner (LP) or angel investor. Below are some core concepts that any aspiring GP should become familiar with.
Investment Mandate
An investment mandate is a set of guidelines and rules for managing a specific portfolio. It’s your fund’s backbone, outlining the focus, check sizes, industries, and stages you’ll target. A clear and well-communicated investment mandate is a great tool for alignment. For example, we had to shift allocations and move money from first-round investments to follow-on rounds in one of our funds. It wasn’t an easy conversation, but we could adjust without rocking the boat because we had built flexibility into the mandate.
For flexibility, use ranges rather than hard numbers in your investment mandate if possible. So instead of “50% for initial investments,” a range like “40% to 60% for initial investments and 30% to 50% for follow-ons” gives you more leeway to adapt. Markets can swing wildly, so your investment mandate should also plan for different scenarios. Spell out what happens during a downturn or what you’ll do if opportunities arise in high-growth sectors. Be upfront about how adjustments will work by including contingency provisions in your limited partnership agreement (LPA).
Capital Call Structures
Capital calls happen when fund managers request investors to contribute their pro rata share of their fund commitments. Unlike operating companies, VC funds rarely keep large amounts of cash on hand. Instead, capital is called as needed. Imagine you’re managing a $10 million fund that requires $500,000 for an investment. This means you’ll need to call 5% of the committed capital from each LP. While this sounds simple, getting every LP to wire their share on time can be surprisingly difficult. There are always a few who forget or delay and that can potentially jeopardize a deal. And while capital calls are legally enforceable, suing LPs is rarely practical because relationships are just as important as compliance.
To avoid these issues, proactive communication is key. Giving LPs sufficient time, ideally, a quarter or two ahead, is one part of the solution. Another is having a good read on deal flow. Suppose a portfolio company is planning a follow-on round — the GP must ensure there’s enough notice to prepare LPs. That requires a solid relationship with founders so they’ll loop you in early, even if they’re not ready to announce a funding round publicly.
Institutional LPs & Fund of Funds
Institutional limited partners are large organizations (think pension funds, insurance companies, university endowments) that invest substantial amounts of capital into venture funds. A fund of funds, on the other hand, doesn’t invest directly into startups or companies, instead, it pools money from multiple investors to allocate into other funds.
Institutional LPs and fund of funds investors bring credibility, resources, and stability to a venture fund. But being big players, they also have stricter regulations and introduce added complexity. Their KYC/AML requirements, for instance, may entail extensive due diligence on other LPs in the fund. This can be a time-consuming operational burden and seem like an overreaching request to GPs who are not familiar with the needs of institutional LPs.
Administration Overhead & Treasury Management
On the topic of operational management, the administrative side is something new GPs often overlook. It’s not all deal-making and fundraising. In reality, there’s a lot of grunt work that also needs attention.
The collapse of Silicon Valley Bank (SVB) brought one such operational challenge into sharp focus: treasury management. Before SVB’s downfall, many funds, including ours, parked most of their money in a single bank account. It was simpler and more efficient at the time. However, SVB’s closure exposed flaws in that approach and changed how many funds manage their cash. Diversifying funds across multiple banks to stay within the FDIC insurance limit quickly became standard practice. This makes sense from a risk management perspective, but it also creates a lot of administration overhead. Now you’re dealing with multiple accounts and the nitty-gritty of their management. Without a dedicated admin person, this responsibility unfortunately falls on one of the partners. That can pull them away from the core work that actually grows the fund, like fundraising and finding investments. For new GPs, this is a valuable lesson: operational management isn’t optional. Treasury planning, in particular, has to be part of your strategy from the beginning.
Evergreen Funds
The timeline for a startup to exit, whether by acquisition or IPO, can vary depending on the sector, market conditions, and the company’s performance. Buyouts take between 5 to 7 years from founding, on average. If the company is looking to go public, you’re looking at an even longer timeline. With early-stage investments, it’s safest to assume it could take up to a decade or more before you see a return. This long timeline can be tricky for traditional venture funds because they usually have a 10-year lifespan. As a fund matures, writing new checks becomes complicated. Let’s say a fund is five years in and spots a new standout startup. That startup could need another 10 years to exit, meaning the fund might have to stretch its lifecycle to 15 or even 20 years.
Sequoia Capital came up with a solution to this challenge: evergreen funds. These funds don’t have a fixed lifespan, so they can keep operating indefinitely. This removes the pressure of exiting investments within a set timeframe and gives fund managers the flexibility to invest in great opportunities whenever they come up. Evergreen funds shift the focus from working against the clock to creating long-term value.
Practical tips to bookmark:
- Define clear allocation in your investment mandate in anticipation of follow-ons and market changes.
- Provide LPs with quarterly notices for capital calls to avoid funding issues.
- Diversify cash holdings across multiple banks to stay within FDIC insurance limits.
- Prepare for 7- to 10-year exit timelines and consider evergreen funds for investments requiring longer horizons.
