Today's thread is on SEC limitations in raising a fund.

This may sound like a BOOOOOOORRRRING topic but it has incredible ramifications for any emerging fund manager and to some extent, founders and how they get backed.

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1) VC funds (right now) require their investors (LPs) to be accredited. (LPs must be worth $1m+ excl primary residence OR earning $200k+ per yr as an individual)

This in itself is limiting, but today's thread is not meant to debate who should be accredited.

2) But that being said, fund managers cannot just accept all accredited investors who want to invest. There's a limit of 99 investor slots.

This means that I, as a fund mgr, have to pick my LPs carefully.

3) For example, if I want to raise $20m, because I'm only allowed 99 investors in my fund, the ave check size has to be $200k+ assuming I fill all the slots.

4) And if someone is worth $1m, $200k is still a BIG CHECK to be writing into 1 fund.

So if it was hard enough finding accredited investors, you have to now find accredited investors who are willing to write a BIG CHECK (relative to their worth) OR are worth A LOT.

5) This is the real reason why you see so many emerging managers with small funds IMO. You can't just go and round up an unlimited number of $10k-$25k checks.

6) Of course, much like in raising money for a startup, it's always really hard to get ppl to write big checks when you have no investors. And you have to get momentum going in your raise.

So, a common tactic that I personally like is starting the min low and then raising it.

7) In our fund 1 @HustleFundVC, we started our raise by taking $25k checks. But at a certain point, we had to balance investor check size with number of slots remaining.

This is tricky...do you take more small checks? Or do you turn investors away to save investor slots?

8) It can certainly be used as a forcing function, "Hey, we're only taking 1 more $25k check before we have to raise the minimum", but in general the 99 investor limit is just annoying IMO.

9) In fact, over the years, we've turned away $100k and even $250k checks! This might sound silly, but if you only have a couple of slots left and you're crossing your fingers for a $1m+ check, then this makes sense.

10) This 99 investor slot rule is something that most ppl don't see, but this the decisions you have to make on the slot probably have the biggest impact on the ecosystem.

Because as you start allocating slots is that you need to reserve some slots for the largest checks.

11) Almost be definition then, the deepest pockets win. They will ALWAYS get access to almost any fund.

Because fund managers need larger checks to fit under the 99 slot limit.

12) Or inversely, smaller investors will have a harder time getting into a fund with a $25k check.

But smaller investors also tend to be less wealthy.

13) So it's an interesting flywheel, where the deepest pockets will continue to have the best access to opportunities and grow their wealth if they pick right.

The smaller investors won't get those same opportunities.

14) This is why if you are considering being an LP and only have $25k, your best shot is to go into someone's fund 1. And take that risk before someone has brand.

Because as the fund size grows, that's the only way to get your foot in the door -- to be there 1st.

15) Because on fund 2, a GP will likely want to increase the fund size and as a result the ave check needs to increase. If you can still only afford a $25k check, having that relationship built is your only way to put in a $25k check.

16) So it's an interest moral dilemma that I think the SEC should consider -- should the wealthiest ppl get the best access simply because of check size? This 99 slot rule creates this dynamic.

17) There are a lot of caveats to this situation that I'll mention as disclaimers. If you have a fund < $10m, then you get up to 250 slots.

If you have ALL qualified purchasers in your fund (wealth of $5m+ instead of $1m+), then you can have up to 2000 slots.

18) But most funds will end up facing the 99 slots problem at some pt or another -- because they want to raise more than $10m. Or because they don't want to have to accept money from only qualified purchasers.

So for the most part, this thread holds true.

19) One of the things that I like about rolling funds is that they have basically created legal kludges to try to help w this problem.

E.g. they separate out qualified purchasers to create a parallel fund automatically for you so you can get more slots.

20) tl;dr - sometimes legal structures hold startup ecosystems back more than anything. And some of these rules need to change if we want to see real change.