How Long Is the Runway? Evaluating Your Fundraising Timeline as a First-Time Venture Sponsor

Article written by?Croke Fairchild Duarte & Beres?Partner? Brantley Hawkins ?and Associate Sukaina Syed

The life cycle of a venture fund begins with the fundraising period. A well-structured fundraising period is essential for establishing the foundation, strategy, and overall timeline of any venture fund — but what specifically do we mean when we say “fundraising period?” Is it a fixed, definite period that is heavily negotiated, or is it a more fluid period, with only general parameters?

We have increasingly faced these questions with a number of clients (both sponsors and investors), and we believe the confusion around how to define the fundraising period can be ascribed, in part, to the way lawyers, sponsors, investors, and industry participants tend to use the terms fundraising period, admission period, and offering period interchangeably. In this article, we will frame and differentiate among each of these terms, and provide insights for sponsors (particularly first-time sponsors) and investors to better understand the fundraising timeline.

Understanding the distinctions among each of these periods is important, especially now, given how current trends have stretched fundraising timelines. These stretched fundraising timelines continue to impact first-time sponsors particularly hard. Launching a successful fund requires sponsors to set a fundraising timeline and communicate such targets clearly and precisely to prospective investors. To succeed, sponsors must be aware of the tools available to sponsors that allow for flexibility, even within the four corners of the governing venture fund documentation.

Fundraising Period

First and foremost, it is helpful to view the fundraising period as an encompassing phase that extends from the ideation of the fund’s strategy to the final admission of investors. This period is not rigidly defined, and there is typically no fixed start date and end date stated in term sheets, fund agreements, or marketing materials. ?

During the fundraising period, several key activities occur, including: determining the target amount to raise, identifying the number and type of investors the sponsor would like to approach, exploring potential investment opportunities, determining whether to engage a placement agent, onboarding service providers, preparing marketing materials, forming entities, drafting documentation, assembling an internal team, conducting investor meetings, responding to due diligence inquiries, and negotiating terms with investors.

The key activities that occur during the fundraising period are often flexible and soft in nature, which is why many sponsors feel that they are constantly in a “fundraising mode.” Once the fund strategy is finalized and investor targets are determined, sponsors often want the process to happen as expediently as possible.

Offering Period

For purposes of this article, the term “offering period” refers to the phase that begins with marketing to prospective investors and concludes with the final admission of investors to the venture fund. In framing the fundraising timeline, the offering period falls somewhere between the fundraising period (described above) and the admission period (described below). While some fund documents may use the term “offering period” to denote what we refer to as the admission period, we find it is more precise and easier to comprehend the timeline when using the definitions provided in this article. By understanding these terms and their distinctions, you can navigate a fund’s documents and timelines more effectively, regardless of how documents reference certain periods.

Admission Period

The “admission period” refers to the period specified in the governing documentation that spans from the first date that third-party investors are admitted to the venture fund until the last such admission. Typically, this period lasts between 12 and 18 months, although the actual duration can vary depending on circumstances. It is important to note that while the admission period is often considered the primary timeframe for bringing in investors, the overall marketing and launch of a venture fund is typically significantly longer.?

Two crucial points must be emphasized when it comes to the admission period. First, the clock for the admission period starts ticking once the fund has held an initial close, not when the fundraising begins. The time spent prior to the initial closing, which falls under the fundraising period, does not count toward the 12 to 18-month admission period. Second, even when a fund has, for instance, a 12-month admission period, there are usually extensions available. These extensions, typically included in the fund governing documents, allow the sponsor to extend the admission period either with the approval of a majority of investors, another representative group of investors, or sometimes with the sponsor’s sole discretion. ?

• Starting the Clock

Traditionally, the admission period begins on the first date when third-party investors subscribe to the fund (commonly known as the first close). However, we have increasingly seen sponsors holding “multiple initial closings” to close on investors that are ready, rather than waiting for a critical mass of investors. This approach involves starting the admission period only after the last of those multiple initial closings, which can be practical when a group of investors forming the initial closing join on different dates. We understand the utilization of “multiple initial closings,” as it can often be practical. It is crucial for sponsors and investors to pay close attention to these terms to comprehend how the timeline is constructed.

• Extensions

Sponsors have the option to extend the admission period beyond the initially specified timeframe. Extensions, typically ranging from 3 to 6 months, are commonly found in venture fund documentation. For example, if a venture fund has a 12-month admission period and utilizes a 3-month extension, the admission period would conclude on the 15-month anniversary of the first close. Sponsors may decide to extend the admission period to achieve specific fundraising targets, accommodate unforeseen demands, or to allow prospects in their investor network more time to participate after conducting due diligence or concluding negotiations.

It is worth noting that the existence of an admission period is not a required feature of venture funds. In fact, certain sponsors choose to admit all their investors to the venture fund through a single initial close. In cases where a single close and an “admission day” occur, it is important to acknowledge the existence of the undefined fundraising period that precedes it.

While strategizing and sequencing tasks throughout the fundraising period are critical to launching a successful fund, it is equally important to have a precise understanding of the period dedicated to fundraising and how that timeline transitions into a more defined framework once third-party investors are admitted to the fund.?Failing to grasp these concepts can make it challenging to navigate the fund’s takeoff. By understanding and distinguishing among the fundraising, offering, and admissions periods, both sponsors and investors can approach the fundraising timeline with greater clarity and effectiveness, laying the groundwork for a successful venture fund.