The limited partner world of finding and selecting venture funds to invest in is similar to what venture capitalists go through with startups.
LPs (the investors who provide the capital for venture firms) look for GP market fit the same way GPs look for startup/product market fit.
Beezer Clarkson, who invests in venture firms through her own investment institution, Sapphire Ventures, says her must ask question to all potential fund managers is “Why You?”
For an LP to invest, they must be convinced that their investment will stand out in a meaningful way and both see the deals they want to invest in as well as get the allocation that they want in a potential startup. And then of course LPs must be convinced that GPs will know how to manage their portfolio, work with their entrepreneurs in good times as well as bad and successfully manage their own operational funds.
LP Market Fit
But what about market fit for limited partners? What makes for a great LP? As Beezer described – there are a number of factors including:
- Persistent Capital – meaning being around to back a GP over multiple funds
- Knowledge and dedication to the venture asset class – having money is an important first step but without a commitment to keep investing year over year into venture regardless of market ups and downs, does just having money matter?
- Openness to the new, be it within an established firm that is evolving over time or new funds coming to market. Investing in top tier venture names can be a great thing indeed. Hence why some of the funds have a 20 year wait list to invest. Cambridge Associates’ research also shows us the power of the new. Their research shows that emerging managers (funds on vintages I and IV) are consistently among the top-performing funds in their vintages.
- Bringing more than money to the table. All LPs have money. But what else can an LP do? They can be a key advisor to the GP, highlighting industry best practices, providing perspective drawn from years engaging with the tech industry. Some LPs are also able to bring business connections and insights to bear on behalf of their GPs’ startups.