Sometimes the firm is made up of managers who have never raised a fund before. In this case, the managers do not have a track record; therefore, raising the first time fund requires more efforts for them than for more established fund managers.
Even for managers with a proven track record from their previous firms, raising the first time fund may be more difficult than follow-up funds, as in most cases they have never worked together as a team before.
Thus, investments in first time funds are ranked as more risky. Furthermore, the importance of reputation in raising capital might induce young fund managers to take actions that are not in line with the limited partner’s interests.
Young venture capital firms might, for example, have incentives to take companies public earlier and more underpriced than more established firms, to establish a track record and signal quality to potential investors. This behavior is known as “grandstanding”.
|First Time Fund|