An inside look into how institutional LPs evaluate funds and how to stand out.
Welcome to the 12th edition of Signature Block, a newsletter sharing insights from venture fund managers (and sometimes LPs like in today’s post). If someone forwarded this to you, subscribe here to get the next one in your inbox.
In November, we hosted a live Q&A with Elizabeth “Beezer” Clarkson, Partner at Sapphire Partners and institutional LP. The session received extremely positive feedback so we invited her back for our first edition of “Ask an LP“.
In this post, Beezer covers:
- How first-time fund managers can maximize their chances of getting their first institutional LP commitment
- Best practices for fund managers to reach-out to, build, and maintain relationships with institutional LPs
- What institutional LPs look for in funds in terms of differentiation
- How institutional LPs view emerging fund managers that are former founder angels vs those coming from VC firm
- How fund managers should think about their reserves strategy
Shoutout to Beezer for contributing to this post! More about her: Beezer is a power-contributor to Signature Block, led the launch of OpenLP, and leads Sapphire Partners‘ investments in venture funds. Give her a follow on Twitter.
What can first-time fund managers do to maximize their chances of getting their first institutional LP commitment?
- Start investing. Building a track record is a very important first step and can be an angel track record, scout, leverage AngelList in a syndicate - whatever works for your dollar amount and reach.
- Build references. Starting building your reference list of both co-investors and follow-on investors, as well as entrepreneurs.
- Do your homework. Some LPs invest in emerging managers and some don’t. There are conferences, events and accelerators now targeting emerging managers and flagging them for LPs. Try to find out as much as possible about who invests in emerging managers and who amongst this pool of LPs is actively investing.
- Check out OpenLP. OpenLP is a resource for the entire venture ecosystem (especially those raising a Fund I) that shares writings of LPs, who they are investing in, what they’re interested in, more about their thesis, as well as tips and tricks for fundraising and emerging managers.
- Network strategically. Start with your network for all the obvious reasons: VCs, CEOs, LPs, etc. Share what you are doing and ask for intros to institutional investors they think might be interested in hearing more and/or investing. Specifically, ask GPs who are over-allocated that have more interest than they can process for intros. If a LP is looking for the same exposure, you might be able to offer it.
- Know thyself (and your fund). Have a clear fund focus and speak compellingly about why you chose this focus, why entrepreneurs will pick you, and what size check and portfolio allocation strategy you are pursuing, as well as your road map. Institutional LPs may very well ask you what Fund II, III or even IV might look like.
- Know your competition. LPs may ask about your competition, so you’ll want to be knowledgeable about their thesis vs yours and able to answer questions about what sets you apart.
- Act as if. Institutional LPs will appreciate financial information organized (including previous track record) as if the FTF was already an institutional investor. The same goes for legal docs, reporting, and having back office operations in place. None of these make one a great investor, but it’s a lower perceived barrier for institutional LPs.
- Make it easy. Create an at-a-glance one-pager that can be shared along with a longer deck with all pertinent info and top stats in one accessible place.
What are best practices for reaching out, building, and maintaining relationships with institutional LPs?
Clear and consistent communication is imperative in helping create a strong GP/LP relationship. LPs want to know you’re in touch with your portfolio and you have a full assessment of its health: cash runway, pacing information, ownership, who was in the round, why you did the deal, how you found it, and how the company is doing. Some folks do routine newsletters, Zooms, or recordings – whatever works for you. Once a quarter is sufficient, and it’s always good to offer to stop by and visit when in town.
What do institutional LPs look for in funds in terms of differentiation? What stands out to you?
LPs look for substantial differentiation, whether it’s perspective, go to market strategy, or investing insight that will last for multiple funds. To be truly powerful, I think it has to be authentic and compelling to entrepreneurs. It’s not just about being able to convince LPs you are differentiated from all the other investors you are competing against, but also incentive for entrepreneurs to choose you.
How do institutional LPs view emerging fund managers that are former founder angels vs those coming from VC firm?
Fair or not, I generally see a preference amongst most larger institutional LPs for investors spinning out of an existing venture fund. The reasons are pretty straightforward:
- They might have already known the investor spinning out, perhaps as an LP in the investor’s previous fund or they may have been tracking them.
- The investor spinning out might also have an institutional track record, which if so, would mean they have then competed and won deals successfully against other institutional investors. In that case, the likelihood of board experience may be higher, as well as experience learning from and working with seasoned investors.
- This also means they’d know what it’s like to manage and invest someone else’s money as well as reporting and returning it.
As a former founder angel, you can work to show that you too have competed and won deals against institutional investors (if true), who you work with/learn from in the venture ecosystem, appreciate the obligations of being a fiduciary of someone else’s money and ask LPs you are pitching if they have ever backed a founder angel before, and if not, would they consider it.
How should fund managers think about their reserves strategy? Has that shifted in today's climate?
My colleague Laura Thompson wrote a great blog on reserves. I wouldn’t be surprised if today’s climate puts more pressure on reserve decisions. That said, I also anticipate most early-stage funds will see a higher loss ratio than years prior. While painful, this is not necessarily a bad thing and could help focus an investor’s potential reserves on a smaller pool of portfolio company candidates.
How is the LP landscape evolving?
Generally speaking, since I have been in venture for the last 20 years, the same types of potential LPs have existed: endowments, foundations, fund of funds, family offices, sovereign wealth funds, and insurance companies. More recently, there have been some new and notable entrants - namely VCs investing in other VCs, and the rise of successful tech entrepreneurs (or their family offices) investing in venture funds.
We’ve also seen new fund formation options for VCs - like rolling funds, AngelList providing GP-like services, and alternative fund structures that allow for public solicitation and fundraising discussion.
What markets do you think are under-penetrated in terms of venture capital? Sector, geography or otherwise.
One of the aspects I find most exciting about early-stage venture is when investors get to the trend before it becomes a trend.
Great article by Alan Feld of Vintage on this topic.
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