The minimum seed capital for an ETF has jumped from $5M to over $25M, not due to rising operational costs, but to convey credibility. A substantial launch amount signals to the market that the fund can sustain itself for the 3-5 years necessary to build a track record and attract investors.
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Mega-funds can justify paying "stupid prices" at the seed stage because they aren't underwriting a seed-stage return. Instead, they are buying an option on the next, much larger round where they'll deploy real capital. This allows them to outbid smaller funds who need to generate returns from the initial investment itself.
A common mistake for emerging managers is pitching LPs solely on the potential for huge returns. Institutional LPs are often more concerned with how a fund's specific strategy, size, and focus align with their overall portfolio construction. Demonstrating a clear, disciplined strategy is more compelling than promising an 8x return.
Contrary to a front-loaded boom, traditional ETF launches show that year-two inflows typically surpass year one. This is because large institutions require long due diligence periods before investing and early buyers tend to add to their positions over time, a pattern crypto ETFs are expected to follow.
To compete with behemoths like Vanguard, new ETFs must focus on boutique strategies that are too complex, differentiated, or capacity-constrained for trillion-dollar managers. Competing on broad, scalable market beta is futile; the opportunity lies in specialized areas where expertise and smaller scale are advantages.
Large, multi-stage funds can pay any price for seed rounds because the check size is immaterial to their fund's success. They view seed investments not on their own return potential, but as an option to secure pro-rata rights in future, massive growth rounds.
Vanguard's first index fund had a ~2% expense ratio (180 bps), far from today's near-zero fees. This historical fact shows that for innovative financial products, low costs are an outcome of achieving massive scale, not a viable starting point. Early fees must be high enough to build a sustainable business.
The bar for pre-seed funding has risen dramatically. With an abundance of startups already generating revenue (e.g., $1M ARR), VCs are choosing these de-risked opportunities over pure idea-stage companies. This "flight to quality" has bifurcated the market, making it extremely difficult for pre-revenue founders to raise.
The initial capital for a new fund-of-funds doesn't come from cold outreach to institutions. The process mirrors an emerging VC's first fundraise, relying on a personal network of operators, VCs, and high-net-worth individuals who already believe in the founder. The strategy is to work the existing network outward, not pitch institutions from day one.
A clever strategy for first-time fund managers is to raise smaller checks from a large number of operators and domain experts. While harder to execute, this turns the LP base into a powerful, built-in expert network for diligence and support, converting a fundraising challenge into a strategic asset.
Before GPs can successfully tap into the retail market, they must recognize the immense operational costs. Managing, reporting for, and administering funds with thousands of small investors has a high break-even point. Without the ability to achieve significant scale, the economics of these products are unworkable.
