Fund Closing: A Comprehensive Guide and FAQ for Venture Fund Managers
Closing a venture capital fund is a complex and strategic process that requires careful planning, legal compliance, and efficient execution. Fund managers must navigate investor commitments, capital calls, regulatory filings, and operational considerations to ensure a smooth and successful closing.
This article provides an in-depth FAQ to address common questions about fund closing, covering timing, LP commitments, fundraising strategies, and best practices.
Frequently Asked Questions (FAQs)
1. Fund Closing Basics
What does it mean to close a fund?
Closing a fund refers to the finalization of investor commitments, legal agreements, and fund formation. It typically happens in stages:
First Close: The initial closing where a minimum percentage of commitments are secured to start deploying capital.
Subsequent Closes: Additional capital commitments are secured before the final closing deadline.
Final Close: The end of the fundraising period, after which no new Limited Partners (LPs) can enter.
What is the recommended time frame to complete a final closing after the first close?
The industry standard is 18 months after the first close, as outlined in most Limited Partner Agreements (LPAs). However, it’s advisable to finalize fundraising as soon as possible to avoid reliance on extensions.
When can a fund start deploying capital?
A fund can start deploying capital only after the first close. Minimum required commitments include:
$10M+ funds: At least 10% or $1M+ committed before first close.
Sub-$10M funds: At least 20% committed before first close.
Upon closing, a capital call is typically made for 25% of committed capital, which is used for operational expenses and early investments.
2. Limited Partner Commitments & Capital Calls
What happens if an LP wants to lower their commitment after signing the LPA?
LP commitments can be reduced, but only to the amount already paid-in.
A simple change agreement is required, which must be countersigned by all parties.
What is the typical deadline for capital contributions after a drawdown notice?
Most LPAs set a 14-day deadline for LPs to wire capital after receiving a drawdown notice.
Some flexibility is built into agreements for reasonable delays.
Can an LP prepay their capital commitment?
Yes, but it creates administrative complexities:
Prepaid capital must be segregated and not deployed until a formal capital call.
Capital is still drawn down according to the fund’s regular percentage schedule.
Can the full capital commitment be taken from an LP at first close?
No, best practices dictate that:
LPs contribute in tranches, with an initial capital call of 20-25% at first close.
Accepting full contributions upfront creates accounting and tracking challenges.
3. Fundraising & Investor Commitments
How can fund managers ensure LPs follow through on commitments?
Set default PACT percentages (e.g., 75% in developed markets, 50% in emerging markets).
Build momentum by securing multiple commitments before first close.
Aim for at least $1M–$2M in signed PACTs before starting fund formation.
What is the ideal target size for a first close?
Funds $10M+ → First close at 10% minimum of the target size.
Funds under $10M → First close at 20% minimum of the target size.
Attempting to close below these thresholds may leave the fund unable to cover expenses or deploy capital efficiently.
How do General Partners (GPs) cover setup costs before closing?
Many fund managers defer legal costs until first close.
Some use personal funds or bridge financing for early expenses.
Once the fund closes, setup costs can be reimbursed through management fees.
4. Legal & Compliance Considerations
Can I use my own law firm while working with Decile Partners?
Yes, but it requires higher diligence and approval, as Decile Partners prefers an integrated legal approach optimized for fund success.
When should fund managers file as Exempt Reporting Advisors (ERA) in the US?
Within 60 days of the fund’s first close.
Requires filing Form ADV with the SEC.
Can I register a Management Company (ManCo) before fund formation and integrate it later?
It’s not recommended, as rolling in an existing entity later is often inefficient. The best practice is to form all entities simultaneously.
5. Special Cases & Fund Variations
Can I blend donation money and investor capital into one fund?
No, donations and LP investments cannot be mixed. The best approach is to:
Structure a traditional VC fund that accepts investments.
Set up a separate donation vehicle for philanthropic contributions.
How much time should a fund manager spend advising founders while closing Fund I?
Allocate ~20 hours per top startup over a few months.
The primary focus should remain on fundraising and closing.
Can I close a fund with only 10% of LPs committed?
Yes, but it’s best to have diversified LP commitments to avoid over-reliance on a few investors. The first close should include multiple LPs rather than a single large commitment.
Conclusion
Closing a venture capital fund requires strategic fundraising, legal diligence, and financial planning. Following best practices around commitments, capital calls, and closing timelines ensures smooth operations and effective capital deployment.
To maximize closing success:
Secure momentum in fundraising.
Ensure LP commitment enforcement strategies.
Follow structured legal processes to avoid compliance issues.
By staying proactive and disciplined, fund managers can efficiently navigate the closing process and build a strong foundation for successful investing.