How Investor Kathryn Cavanaugh Raised A $41M Venture Fund
August 18, 2021
Kathryn Cavanaugh has been investing in early-stage startups since 2005. In 2019, she launched her own venture capital firm, Capstar Ventures, which invests in entrepreneurs who address unmet needs that resonate with Millennial and Gen Z consumers.

She's built a firm that truly partners with founders, leveraging her knowledge from working with thousands of early-stage founders for the last 15 years. This year, Capstar Ventures closed $41.3 million in its inaugural fund with backing from high-caliber investors. In her interview, she shares how she turns consistent networking into successful fundraising and investing.

You founded Capstar Ventures in 2019. What is the thesis of your fund? Who are you investing in specifically?

We invest in founders who are addressing unmet consumer needs they have personally experienced. Our founders solve their own pain points and directly relate to and resemble their customers, resulting in an authentic connection that we have seen repeatedly translate into high-growth companies. We take a high-touch collaborative approach to investing and are actively involved with our companies from seed to scale.

I'm very mindful of who we back. Early-stage investing all comes down to backing founders. We back passionate, resilient, low ego, high integrity, coachable founders. Currently, we have 13 portfolio companies, all of which continue to exceed expectations.

You just raised a pretty sizable fund. Fundraising is hard. What was the most difficult hurdle, and how did you navigate it?

How long do we have? Fundraising is very hard and raising the first fund is always the hardest. It requires perseverance, persistence, optimism, and strong willpower. It's all-consuming. Fortunately, this is my sixth time raising a venture capital fund. So technically, while it's my first fund, it's not my first fundraising process.

In terms of some of the elements you have to navigate, the first would be anchor capital. Getting a fund off the ground requires significant anchor capital. While I had the track record, judgment, network and experience to launch an early-stage VC fund, I needed anchor capital. I started by asking a select group of mentors if they knew of any potential anchors, which serendipitously led to an introduction to my anchor investors in 2018.

A second element that is challenging is identifying the right limited partners (LPs) and getting them to commit to investing. Raising a first-time fund is all about building trust and credibility with limited partners who are backing you. Once you secure introductions to relevant LPs, it takes time to build a trusted relationship where they have conviction in your ability to invest their capital. Your time is very limited, so it is essential to target LPs that resonate with your fund size and strategy. Getting to “no” quickly is critical, so you are not spending significant time talking to LPs who aren't a fit at that moment. However, they might fit future funds, so you want to continue building relationships with them. Knowing where they stand allows you to better prioritize how to spend your time.

Getting to “no” quickly is critical. Knowing where they stand allows you to better prioritize how to spend your time.

As a Founder and Managing Partner, what does your day-to-day consist of?

I operate across five verticals: 1) deal sourcing and due diligence, 2) portfolio company management, 3) operations - managing fund reporting, 4) general networking, and 5) fundraising.

No day is the same. Each day involves meeting new people and hearing new ideas, which is always interesting. I’m continuously meeting founders and evaluating new deals while also speaking with the founders of our portfolio companies to support them on various initiatives. There is also a lot of networking which I love. I speak nearly every day with other VCs to share notes on interesting founders, new opportunities, and industry news.

When we are fundraising, it is the principal activity, and it is all-consuming. Fundraising requires travel with constant tracking and personalized follow-up to create a sense of urgency to close. Typically, there is extensive travel to meet with new investments, visit existing portfolio companies, and attend Board meetings or industry events. In person meetings are always better than calls and Zoom.

The pandemic has switched the majority of meetings to Zoom which many founders prefer. From an investor perspective, what's the benefit of in-person connection?

Investing successfully in the early stage is all about founders. You are essentially entering into a marriage since investors are typically in startups for 5, 10, 15 years.

Ultimately, you are deciding if a founder is backable. People are different on Zoom versus in person. People give off energy in person that is hard to sense on Zoom. You can do all the backchannel references you want, but I still think it is essential to meet with founders in person to understand, Is there a connection here? Do I believe they're coachable? Are they transparent and open? Do they view me as just a check? I don't want to invest in founders that view Capstar Ventures as a bank. I want founders seeking value add guidance, in addition to capital, as they transform their idea into a reality.

Fundraising is all about storytelling. What pitching advice would you give to founders about how to tap into a story that would ignite investor interest?

Founders should research every investor they speak with to understand what matters to them. Investors have short attention spans, so founders should articulate what the pain point is, why they are the person to solve it, how they can execute their vision, and how the investors will make money. Founders should also explain what differentiates their offering from the competition in a non-degrading, very matter-of-fact way.

Why are there so few female fund managers, and how do we change that?

There are various unique factors at play in venture capital. Firstly, early-stage venture capital is an apprenticeship industry where you learn from experience how to pick founders and recognize patterns while building companies. It takes a long time to know if you are good at venture capital and even longer to build a track record.

Secondly, venture capital firms are generally tiny, with low turnover at the partner level and little succession planning. There are typically not many spots available with few entry opportunities. It is common to switch firms if you want to be promoted into decision-making investing roles.

My hope is that the current rise of female fund managers will create a new generation of women in investing roles.

What is your favorite part of your job?

There is so much that I love about venture capital. It is all about people with constant exposure to risk-taking and innovation. It is intellectually stimulating to consider where the world could go, not where we are today. It never feels like work. I'm continuously meeting founders who want to create something new that improves people's lives. It is an honor to work with founders. I have the ultimate respect for them and their willingness to take risks. Founders are taking all the risk. VCs only manage risk.

What mistakes have you made during your career? And what did you learn from them?

I can offer a piece of advice that, when not followed, will result in losing money. Pick exceptional founders. It is a mistake to place more value on the product, service, or technology than the founder. It's better to back an A-plus team with a B plus product than vice versa. An A-plus team is open to advice when in a tough place and has the resilience and ability to pivot if their original idea is not working.

What do you attribute to your success?

These are good questions. Firstly, I'm the only daughter in a family of four brothers. I learned very early on how to speak up for myself and how to hold my own. I have also built my career in the male-dominated fields of engineering and venture capital. I'm very comfortable in environments where there are very few women. I view being a woman as an advantage in the investment industry because investing is all about information. Women always get more information. People underestimate us, and disclose a lot of information, assuming that we are not decision-makers. Lastly, it is vital to know when to use the velvet hammer. Knowing when to use humor in professional situations helps to put people at ease and make yourself heard.

Final question. Women on your radar?

I have eleven. Eleven of our thirteen portfolio companies to date are run by female founders. I want nothing but great success for all of them because I know how hard they work and how much they have sacrificed to be where they are today. They are all incredibly smart and resilient. These founders consistently demonstrate both heart and hustle while running their companies. They are a joy to work with, and I'm honored to be an investor in their companies.



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