New wave of VC funds show it’s time to rethink how many LPs is ‘too many’

Last month, Chicago-based Chalo Ventures surpassed 100 LPs. For founder and general partner Haris Khurshid, it was a notable milestone toward the firm’s goal of hitting 1,000 LPs, a number that would likely make most legacy investors wince.

But while there are a number of potential annoyances or issues that come with having a larger LP base — more people means more opinions, after all — it seems that newer funds are raising cash from more LPs than ever before. But not always by choice.

Data from research firm Different Funds found that the average number of LPs in funds regardless of size or fund maturity had been steadily climbing since 2016 through 2021, the most recent year that data included.

For Khurshid, having a lot of investors is tied to the firm’s mission of being one of the few outside investors into startups in Pakistan. “We are trying to change the trajectory of an entire country,” Khurshid said. “We are the largest fund investing in the country, and the companies we are invested in can change [the direction] of the whole country over the net five years, if they are committed.”

Despite having a lofty LP target, Khurshid said he’s still quite picky about who gets to invest. He looks for potential investors to be committed to helping out the portfolio companies down the line and keeps them organized in Slack channels by industry and the potential value-add they can bring.

Though it definitely creates organizational hurdles, Khurshid said the large LP pool is worth it because it brings needed expertise and guidance to companies located in a market that doesn’t offer much support to them otherwise.

Mac Conwell, the founder and managing partner at RareBreed Ventures, said that having a larger LP pool — in his case, around 140 —  aligns with his firm’s mission of democratizing access to wealth through venture investing.

He agreed that having more backers definitely creates more communication problems and joked that he has three buckets of LPs: ones who only check in to congratulate, ones he doesn’t hear from, and those that are looking to chat through every decision. But, he said the LPs’ contributions are worth it. “It comes down to what’s important to you,” he said. “Ease of running your fund or optimizing for giving people opportunities to the asset class? Allowing people to invest in you because you invest in things that they care about aligns with the mission of your fund.”

Many of these funds are raising from smaller LPs that tend to be operators or those already immersed in the venture industry. But many of these smaller check writers may be able to help firms on the deal side, too, where a concentrated LP base of large institutions might not, said PitchBook venture analyst Vincent Harrison.

“I think one potential benefit of that is if you can find LPs that fit your investment strategy, being able to leverage that to generate additional deal flow,” he said. “If you have LPs that have experience or expertise in a number of different industries and are willing to pass on that expertise, it could help you establish that track record to go out and attract larger LPs.”

Of course, many emerging firms — unless they’re spinning out of a large VC fund with existing LP support — don’t have a choice but to raise from a large number of small-check writers.

Conwell knows this too well as he has been spending an increasing amount of time recently working to raise the limit of LPs in U.S. venture funds through lobbying efforts in front of Congress.

He said the current limit of 100 not only holds back these first-time funds but also emerging managers as they grow. As he thinks about Fund II, he hasn’t been around long enough to have the track record or the size to attract the larger LPs, but targeting a bigger fund than his last means he might not be able to raise the amount he wants by going back to his existing LP base.

“As folks are raising their first funds or second fund, it’s really hard to get institutional funds but people can’t write big enough checks. The pool you can pull from is really small,” Conwell said. “Ever since I did my first raise, I was thinking about how to increase the number of LPs you are working with.”