5 lessons we’ve learned from building a venture fund from scratch

This month, we’re five years into building Contrary. Along the way, we’ve raised hundreds of millions from some of the world’s top institutions and have been fortunate to back startups like Ramp, Anduril and many others.

But just like the stories of the startups we back, the journey has taught us a number of lessons the hard way.

I’ve been reflecting on our history as we hit this milestone and wanted to share a few things that I wish I knew five years ago.

Early logos are important

One of the few regrets I have is that we didn’t go logo-hunting early. We didn’t chase hot companies that were raising rounds led by household name firms. Instead, we stuck to our knitting on Fund I, leading rounds in startups and teams we were convinced in and had sourced via our own infrastructure. I was under the impression that if we did precisely what we said we’d do — lead rounds, back great talent, bring a unique model to market — we’d stand out.

Turns out, when you’re building a venture firm from scratch (limited track record, didn’t work in venture prior, etc.), logos matter. They matter for prospective LPs, who use them as a proxy for access; they matter for your peer set, who use them as a proxy for how sharp you are; and they matter for founders, who will immediately head to your website and see if you’ve backed name-brand startups.

Fast-forward to today. Ironically, our Fund I is one of the best of its vintage year, according to Cambridge Associates benchmarks. But that performance took five years to blossom, and it made raising Fund II more difficult. I once had an LP ask, “Have you invested in any startups I’ve heard of?”

It’s long stopped being an issue, but there’s no doubt in my mind that logo- hunting would’ve saved us time in the early years.

Reputation is critical

In an industry where your reputation and brand are the most important parts of building a firm, getting started from day zero is critical. Early logos are just one piece of the puzzle.

Invest heavily in building meaningful relationships with well-respected partners, founders and LPs. Send them relevant, high-quality deals for free; become Twitter friends; go to events; co-invest in firms; and cold email them and grab coffee. Do whatever it takes, because relationships are currency in more ways than one.

As an example, one of the primary ways LPs will evaluate you and your fund is by aggressively checking references with their existing venture managers. They’ll ask if partner X has heard of you, if they’ve worked with you, and if they’d bring you into deals.

This requires brand awareness at the bare minimum and ideally includes years of collaborating and producing stellar results. The best way to build your reputation is by sending deals to investors that ultimately make them lots of money.

We once gave an LP of ours the chance to co-invest in a seed-stage company that went on to become a unicorn. They made millions of dollars from that angel check, and their evangelism will pay reputational dividends for years to come.

This is the mindset you need to adopt. Having well-respected partners at top venture funds vouch for you is the single best way to raise capital and build reputation within the venture world.

It takes a village

As with most things in life, starting a venture fund takes a village. It is, by definition, a network-oriented business that you can expect to lean on aggressively as you build your franchise.

There are dozens of balls to juggle:

• Getting and distributing quarterly financials through your Carta team.
• Hundreds of LP meetings (of which very few will convert) to raise your next fund.
• Hiring a team and making sure they’re set up for success.
• Swapping deals and catching up with fellow VCs.
• Getting existing founders to refer you to people who are starting companies.
• Negotiating rounds alongside top counsels like Cooley or Gunderson.
• Wiring money, managing documents and updating financial models.
• Helping founders get a critical hire over the finish line.

And there’s so much more. All of this requires not only an ability to constantly switch between contexts, you also must have earned trust with a huge cross-section of parties, convincing people at each turn to partner with you as you build your firm.

While this networking-driven mindset can build a broad coalition, you also need a handful of deep relationships. A couple of leaders vigorously pounding the table has pushed us forward more than dozens of others supporting us more passively.

When done right, your village will become your best leverage.

Don’t start a venture fund for the money

When we were starting out, I vividly remember a friend telling me that if done correctly, venture is a “get rich slow” game. In other words, if you’re good at it, you’ll do well, but it’ll take years to see meaningful upside.

Five years in, I’ve realized that more prescient words have never been spoken. I started paying myself at the beginning of January 2022 — you read that correctly — and I continue to be the lowest-paid person at Contrary.

While we’ve received a few small distributions from portfolio companies with acqui-hire-style outcomes, we’ve yet to enter carry mode, which is typical for a fund that was largely focused on pre-seed and seed deals in its early days (our first two funds were just that). I expect we’ll see distributions in one or two years, but regardless, it will be nearly a decade before we see meaningful upside.

This is doubly true in this more competitive era of venture. GPs at large firms are often criticized for pocketing millions of dollars in management fees, which reduces pressure to perform as a fund and earn carry. LPs increasingly want to pay “2 & 20” (or more) fees on a fund only if “the 2” is put to work hiring a team and building a moat rather than funding the lifestyle of the partners.

To be clear, venture is one of the best jobs in the world, and it’s an extremely privileged opportunity that I’m grateful for each day. But you require both luck and a very long-term mindset to do it well. Most other financial services businesses (hedge funds, traditional private equity, etc.) are far more lucrative if money is your sole goal.

If you want to build something special, expect to do it for over 20 years

Most startups have a general sense of whether they’ll be successful within three to four years and have defined outcomes within a decade.

When starting a venture fund, you should expect to barely have an understanding of whether you’re competent at the role within three to four years. You’ll have completed just one feedback cycle in a decade. That lack of feedback translates directly to the general pace of venture firms – it’s slow. Everything is slow.

Building a brand, credibility and a track record takes time. We’re five years in, and it routinely feels like we’re just getting off the starting line. Fortunately, I’m even more energized by what we’re building than the day we started. But the reality is that if you aspire to build a generational venture firm, 10 years is just the opener. Expect to do it for 20 to 30 years.

Building a venture firm — like anything worth doing in life — is hard. You’ll see constant rejection, especially in the early days, and if you don’t come from a credentialed background, it’s even harder. But I wouldn’t trade anything in the world for being able to spend each day talking to and partnering with the most talented and ambitious entrepreneurs.