In the world of venture capital, ‘Connectors’ are individuals with an extensive network of potential investors or limited partners (LPs). They serve as a bridge between general partners (GPs) at venture capital firms and potential LPs, facilitating introductions that could lead to fruitful partnerships. However, for GPs looking to raise capital, especially those at new and emerging venture capital firms, it is crucial to understand and navigate the delicate terrain of securities laws to avoid triggering general solicitation.
The Role of Connectors
Connectors, individuals who maintain expansive networks encompassing wealthy individuals and potential limited partners, serve as conduits between general partners of venture capital firms and potential investors. With their broad connections, Connectors can provide access to an array of potential limited partners that might otherwise be challenging to reach.
Navigating General Solicitation
While Connectors can play an instrumental role in venture capital fundraising, it’s essential to manage these relationships wisely to avoid triggering general solicitation concerns. General solicitation occurs when a company or individual seeks investment capital from the public. According to the U.S. Securities and Exchange Commission (SEC), general solicitation involves publicly advertising the offering and selling securities. If improperly managed, Connectors’ activities could inadvertently trigger general solicitation issues, potentially leading to regulatory scrutiny.
Best Practices for Connectors
To safely and effectively utilize Connectors, they should primarily focus on facilitating introductions between the general partner and potential limited partners. It is critical that Connectors refrain from sharing detailed information about the venture capital fund or its investment thesis with potential investors unknown to the general partner. Instead, Connectors should highlight interesting aspects of the general partner’s background and suggest the potential for an appealing opportunity, without diving into specifics about the fund or its investment strategy.
Connector Introduction Examples
When it comes to creating an impactful introduction, the goal is to pique the interest of the potential limited partner and set the stage for the general partner to delve into details during a subsequent meeting. Here are a few examples of how a Connector might make an introduction:
Example 1: Highlighting General Partner’s Track Record
“Dear [Limited Partner],
I hope this email finds you well. I wanted to introduce you to [General Partner], who has had a remarkable career in the technology sector. They were instrumental in leading [Tech Company 1] through its exponential growth phase, and also played a key role in securing the successful exit for [Tech Company 2]. Currently, they’re focusing their energy on some intriguing new initiatives that I believe you might find interesting. I highly recommend setting up a meeting with them to explore potential synergies.
Best,
[Connector]”
Example 2: Emphasizing General Partner’s Unique Skillset
“Dear [Limited Partner],
I trust you’re doing well. I would like to introduce you to [General Partner], a dynamic individual who has made significant strides in the venture capital landscape. Their unique ability to identify promising startups and drive them towards market leadership has been demonstrated repeatedly. Currently, they’re channeling their unique skillset towards some exciting new ventures that align perfectly with their track record. I believe a conversation with them could prove to be quite enlightening.
Warm regards,
[Connector]”
Example 3: Showcasing General Partner’s Industry Influence
“Dear [Limited Partner],
Greetings! I am reaching out to introduce you to [General Partner], a trailblazer in the [specific industry] industry. Their influence in shaping the industry’s landscape through strategic investments and partnerships has been nothing short of impressive. They’re currently leveraging their expertise for some innovative pursuits that I think you may find intriguing. I’d highly recommend arranging a meeting to learn more about their current endeavors.
Kind regards,
[Connector]”
Each of these introductions highlights the general partner’s achievements and skill set, while subtly suggesting that they are working on something potentially lucrative. The goal is to intrigue the limited partner and encourage them to take the next step – a meeting with the general partner.
Establishing a Substantive Relationship
Once the Connector has facilitated an introduction, it’s incumbent upon the general partner to build a substantive relationship with the potential limited partner. During this relationship-building phase, it’s essential to verify that the potential limited partner is accredited and possesses the financial capability to invest in the venture capital fund. This step is crucial not only for the potential investment but also for staying in compliance with SEC regulations.
After establishing a substantive relationship and confirming the potential limited partner’s accredited status, the general partner can then delve into the specifics about the venture capital fund and its investment thesis. At this stage, it’s appropriate and necessary to share fund materials and discuss in detail the fund’s strategy and potential investment opportunities.
Compensating Connectors
When it comes to compensating Connectors for their assistance in facilitating introductions to potential limited partners, general partners must tread carefully. Offering a percentage of the capital raised to Connectors can trigger broker-dealer regulations, leading to a complex set of legal and operational issues.
Under the U.S. securities laws, anyone who receives transaction-based compensation related to securities transactions must generally be registered as a broker-dealer. As such, it’s advisable for general partners to avoid offering, and for Connectors to refrain from requesting, a percentage of the capital raised as compensation.
Instead, consider the following alternatives to show appreciation and maintain a positive relationship with your Connectors:
- 1. Dinner or a Special Event: Taking your Connectors out for a nice dinner or inviting them to a special event can serve as a token of appreciation for their assistance. This gesture not only shows gratitude but also offers an opportunity to foster a deeper personal relationship.
- 2. Business Assistance: If you’re in a position to support your Connectors in their own business endeavors, offer your help. This might involve providing advice, making introductions to your own network, or offering resources that could assist them in their projects.
- 3. Prioritizing Introductions: If a Connector proves to be particularly helpful, make a point of prioritizing their introductions. This could mean responding to their emails promptly, setting up meetings with their referrals swiftly, or generally showing enthusiasm for the connections they provide.
- 4. Venture Partner: If a Connector consistently brings in high-value contacts and shows a deep understanding of your fund’s vision and strategy, you might consider offering them a venture partner role under a Venture Share agreement. This role typically involves a more substantial commitment from the Connector, but it can also provide them with a more significant stake in the fund’s success.
Ultimately, the key is to ensure that any compensation or benefits provided to the Connector do not constitute transaction-based compensation tied to the capital raised, thereby avoiding potential broker-dealer issues. It’s a delicate balance to strike, but with careful planning and foresight, you can maintain a strong network of Connectors without running afoul of securities regulations.
Conclusion
In conclusion, Connectors can serve as a valuable resource in venture capital fundraising, providing general partners with access to potential limited partners. However, to effectively and safely leverage Connectors, it’s essential to adhere to best practices and SEC regulations regarding general solicitation. By doing so, general partners can successfully and compliantly expand their investor base, propelling their venture capital firm towards new heights of success.