In tech, quite a number of venture capitalists have shared through blogs and podcasts how they invest in startups. An even larger number of founders for years have shared how they build their companies. But it was not until recently that LPs begun sharing how they invest in venture, especially in fund managers.
We try to understand — why you? Why are you doing this fund? Why are you going after whatever opportunity set you are after? Why do you think you’ll be competitive, your geographic focus, your expertise — it could be all sorts of things. Understanding your General Partner CEO company fit is really important.
We have not invested in people who have never invested before. We have invested in people who have spun out. We’ve invested in very strong non-institutional angels. We look to underwrite Series A funds with 3x net. And a seed fund 5x net. We have to believe that’s possible. We will look at when you’ve made investments, how many of them have become a 5x or 10x return, and how many of those need to be true. And who’s in the team? How big is the team, and what are the team dynamics?
Is it difficult to invest in first-time funds?
We look to invest in the best venture funds. These could be first-time funds, or more established funds. Our process, regardless of vintage, remains unchanged.
I’m not sure if it is any more difficult to invest in first-time funds than in established ones. It may look that way on the surface and there are certainly some different variables to consider — how well a new GP understands the business of fund management, what it takes to win a deal, will they be able to get access to the right deals and will they be a good investor — but there are no guarantees at the outset of how any fund will perform.
Investing alongside LPs you respect is always a plus. And while fundraising can take multiple forms, the great majority of times the GP runs it. LPs may speak to each other as part of the diligence process, but in allocating constrained funds, the opportunity to “inspire others to club up” is pretty much impossible. For newer funds, ones still institutionalising their LP base, there can be opportunities to introduce GPs to new LPs. We do that frequently for our GPs, at their request. Connecting LPs to GPs starts with understanding what sort of opportunities an LP is allocating to and finds interesting. Then it is just a matter of introducing them to the right GP.
For new fund managers, it is important to ask potential LPs why they are interested in their asset class.
Why venture and how long have you been investing in it?
I like this question because it’s an open-ended way of learning about an LP’s interest, experience, and perspective on venture. Understanding more about an LP’s background in venture helps you filter choices for a good fit for your fund.
Maybe you want to weed out investors who don’t know how the venture capital asset class works. Investing in venture is different from writing an angel check or investing in more liquid assets. There isn’t anything inherently wrong with taking on LPs new to venture, but it does mean taking the time to teach them the ropes.
Alternatively, you might be searching for an LP that will add value to your fund by sharing their expertise and opening their network by way of introductions. Learning about an LP’s track record gives you a window into their larger investment philosophy.
Ask open-ended questions and LPs will often bring information to the table that you hadn’t even thought to ask. It can also be a method to gauge how committed an LP is to venture and whether they’ll be there long-term for future funds. As a GP, you’re looking for persistence in partners who will invest with you over multiple fund cycles.
Check out the #OpenLP website here to find articles, blog posts, and podcasts of other LPs in venture.
To learn how an LP evaluates a new fund manager, listen to Beezer Clarkson on Capital Allocators.
Post by Marcelino Pantoja