Knowing Limited Partners

Shortening VC Learning Cycle

I recently listened to two podcasts from Nick Moran's show - The Full Ratchet about limited partners, covering pieces around, types of LPs, key players, strategic differences between types of LPs, portfolio structure for LPs, allocation to venture capital, how LPs evaluate VC fund managers, and how to be good at fundraising as a first-time fund manager.

My Key Takeaways: 

1. LP - Limited Partners are capital providers, which pool capital together in an SPV, GP, or AMC actively manages that. Types of LPs: 

   1. Retail: HNIs and Family offices (formal team managing HNIs wealth)

   2. Institutional: Foundations, Development Agencies, Government, Endowments, Insurance Funds, Pension Funds, OCIOs (Outsourced CIOs), and Fund of Funds. 

2. Institutional Capital has the following issues: 

   1. Longer Process

   2. Slow Decision Making

   3. Many gatekeepers in the form of consultants 

   4. Wrong Incentives aligned for the staff - lead to very risk-averse investments 

   5. Almost all the institutional investors have portfolio allocation in VC as an asset class, so a fist time fund manager raising capital is competing with an existing portfolio. Also, VC portfolio allocation competes with other equity exposure. So, if anything goes wrong in the market, LPs pulls the lever of stopping making new commitments to GPs. 

3. Retail Investors are generally ready to high risks, and first-time funds should focus on them. 

4. What LPs look for in the GPs?

   1. Sourcing Advantage: Do they proprietary pipeline in terms of sourcing ventures and have differentiated value proposition? (Be obsessed about entrepreneurs in terms of creating differentiating position) 

   2. Internal Team Dynamics 

   3. Portfolio Construction Strategy and Investment thesis, this is important for first-time fund managers. 

   4. Track record, not just transaction track record, but do they have multiple exits? And how well they perform as board members. 

   5. Relationship with other GPs/ LPs

   6. Legal terms, i.e., what kind of legal terms GPs are offering to LPs.

5. First Time Fund Managers: As I mentioned above, GPs need to have a very coherent plan for a business model, portfolio construction & investment thesis. Also, GPs should find a way to should their through leadership via mediums like podcasts and blogs. 

The other podcasts that I recommend related to this topic are:

• 20VC: Inside The Mind of A Leading LP: How LPs Evaluate New Fund Managers on Everything from First Meeting to Portfolio Construction To Fees and Carry with Lisa Edgar, Managing Director @ Top Tier Capital Partners

• Lo Toney, Plexo Capital: "Lo Toney is the founding managing partner of Plexo Capital, a new $42.5 million fund incubated inside of GV focused on making investments in seed-stage VC firms led by women or people of color." It is an exciting fund https://www.linkedin.com/company/plexo-capital

• LP Value Creation, Why DPI is King, and Secondaries as a Means of Exit (Sarah Anderson)

• Chaos Capital, the new Micro VC Movement and LPs Chasing Hype (Chris Douvos)

I am continuously looking for first-time funds and first-time fund managers who are looking to create their first-time impact funds with an edge or a differentiated value proposition in emerging economies. If you are building one, please do write to me. I would love to learn more from you and would be happy to help in any way.

With Love,

Sagar

About

"first followers" is founded by Sagar Tandon, a founding member at Moonshot Ventures. You can reach him at sagar@moonshotventures.org.

Occasionally, he blogs about the responsible investing, tech for good, venture capital, investment thesis, conscious capitalism, collaborative consumption, community, and humane lifestyle.