What we learned launching a VC firm at 21 and 23 years old

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In January 2018, my co-founder Nandeet Mehta and I announced our first ever venture fund, Prototype Capital. It’s a fund and studio investing US$5 million over the next 18 months, with scouts all over the country sourcing deals.

Launching it is unlike anything we’ve ever done, and much unlike fundraising for a startup. Here are some of the things we learned.

1. If raising money for a startup is hard, raising money for a fund is 10x harder

In late September 2015, we originally planned for a distributed fund with former or current founders as venture scouts around the world. Since then, we were “informally” on a limited partner search (we were still students).

It took us a little under two years to raise funds. We had over 400 meetings/phone conversations with potential LPs from larger VCs, pension funds, family offices, high net worth individuals, and corporations—all of whom said no.

As first-time fund managers who were young and had never invested ourselves before (we had both worked at VC firms, but not as partners), most LPs wanted to see some kind of traction before they were willing to commit. However, nobody was willing to take the first bet. Without capital to invest, we couldn’t show traction, and without traction, we couldn’t raise capital.

Ultimately, we decided to show growth by convincing top founders to serve as scouts in frontier cities in the US, finding a set of deals that we’d invest in if we had capital, and advising startups to show we could get into major deals.

2. Age plays a massive role—many people didn’t take us seriously

It’s common—and even an honor—to be a young startup founder today. But VCs are traditionally seen as gray-haired ex-entrepreneurs who are at least in their 30s. Even though we had an exit under our belt, we were aged 21 and 23 when we closed our first fund (we were 19 and 21 when we informally “founded” the fund). So, most seasoned LPs didn’t take us seriously. While many of them were at least willing to take a meeting because of our strategy, very few were willing to commit.

There really isn’t any way around this except to focus on why your age is a benefit more than a liability. We focused on the fact that our age would allow us to understand millennials and the Gen Z, fund and build companies aimed at those markets, and find under-the-radar founders through our scouts.

3. To separate yourself, your thesis needs to give you an unfair advantage

Having a unique thesis (i.e. not just anything like “we’re going to invest in SaaS companies in the Bay Area”) is vital in convincing LPs why they should look away from traditional Silicon Valley VCs and take a bet on us.

In our case, we noticed the software industry is becoming saturated and noisy, and prophesied that traditional industries like healthcare, transportation, consumer packaged goods, and manufacturing are where massive transformation will happen in the next 50 years. In these industries, potential founders who have domain-level expertise are distributed all over the country. So, our “unfair advantage” was our scouts who were able to find founders around the country that other VCs aren’t paying attention to.

LPs were willing to consider our thesis because we had essentially “outsourced” dealflow (a major part of the VC supply chain) to a scalable process, something that no other VC had executed before.

4. It’s all about having a champion

Like most things though, fundraising comes down to someone who’s willing to take a bet on you as individuals. Ultimately, after having on-and-off conversations with our LPs, we had built a network of 10 founders as scouts, sourced 200+ deals, and created processes to scale the fund.

Because of this traction, we were finally able to convince LPs to commit. We’re no longer a couple of “kids” playing around but a formal fund with successful VCs backing us.

5. The funding sources are less obvious

6. Your returns should at least be greater than the annual return of the stock market index 

7. You’re running a company as much as a fund