Speaking at the GCV Digital Forum 2021, Nicolas Sauvage, managing director of TDK Ventures, the corporate venturing arm of electronics producer TDK, has provided advice on how to raise a second fund.
The firm closed its sophomore fund on $150m in April 2021, collecting three times the capital raised by its debut vehicle, which was launched nearly two years ago.
“It is important to think about why you want to raise a second fund, and the reason should not be simply because you are running out of money from your previous vehicle,” said Sauvage. “You need to leverage what you have learned from fund one and show how you plan to accelerate growth in your next vehicle, by augmenting and optimising what you have accomplished before. Furthermore, strategy is also about deciding what you plan to avoid: make sure that you are explicit about what you are not going to do with your vehicle.”
Timing is also very important when preparing the launch of a new fund, as Sauvage explained. “You should estimate when you plan to complete building your first fund portfolio and make your final investment,” he said. “You also need to carefully plan how to spend your reserves, the capital that you keep for cash flow and build-up investments of your existing portfolio companies. This is particularly important because some corporate investors might not understand why you plan to start raising a new fund if you have not fully deployed your previous vehicle.”
According to Sauvage, it is also useful to establish clear criteria that will determine your sector focus. “We identified three criteria,” he explained. “Aligning our investments with the long-term strategy of our mothership; investing in sectors where there is space for growth, that are not already overcrowded and where it is possible to achieve long-term financial returns; and choosing areas which the team is very passionate about. Passion really matters, because with passion your team will deliver higher quality due diligence, better engagement with entrepreneurs and investors and higher added-value.”
Sauvage also underlined the importance of determining the size of the fund, which should be carefully chosen and only based on the firm’s investment strategy. “Make sure that it is your strategy that is driving your fund size and not anything else,” he said. “You should decide the size only once you have defined the strategy that the fund will follow and you have a clear view about it.”