The VCs guide to LPs covers the core issues GPs may face when trying to prospect, close and interact with Limited Partners. This guide answers the following questions:
This is the Ultimate Guide to VC Limited Partners, brought to you by VC Lab. Our accelerator program helps GPs launch and grow their top decile funds using our proprietary methodology and tools. Find out more here.
What’s an LP?
Limited Partners (LPs) are investors in your fund that provide capital. The most common types of LPs are high net worth individuals, pension funds, family offices, sovereign funds and insurance companies – just to name a few. They can be individuals or corporate entities themselves, but are nonetheless called LPs by you and your team.
Getting LPs to invest in a first-time fund manager is challenging, and requires you to pursue your fundraising process with discipline and care. Having a vetted process to follow from thesis to launch makes that a lot easier, and greatly increases your chances of success. The VC Lab accelerator is designed to walk you through that process step by step, and to provide the technical, mentorship and relational support you need to be successful.
Here’s Melissa Allen, alumnus of the program, discussing the benefits of following the process and her journey.
What are the common types of LPs?
There are four major type of Limited Partners (LP): High Net Worth Individuals (HNWIs), Family Offices, Pension Funds and Sovereign Wealth Funds.
Though Limited Partners can technically come from any background and have several different legal structures, there are some common LP archetypes that you should be aware of. As a general rule LPs don’t advertise their investment activities on LinkedIn or other channels, so you have to use some smart sleuthing and sourcing skills to ferret them out. Here are some of the most common types of LPs and their motivations.
High Net Worth Individuals
High Net Worth Individuals are generally those with over $1M in liquid assets, though there is no universally accepted minimum, and it varies by country/region. HNWIs can come from any background, have any educational or professional experience, and be located anywhere. Clusters of HNWIs can be found among professionals, executives, entrepreneurs and – of course – investors. HNWIs who invest directly are generally looking to increase their wealth in the medium to long term, and can make their own decisions (perhaps in concert with a spouse). If they’ve not done a lot of investing, they may be motivated by access to deal flow that is otherwise closed off to them.
Family Offices are entities formed by families (or very HNWIs) to act as investors on their behalf. Typically, an FO will have a structure similar to a venture fund, but with varying degrees of active management and full time resourcing. Family offices often handle the entire trust portfolio for a group, and mostly consider longer-term ROIs when allocating investable assets. Family Offices also tend to hold a lot of illiquid investments and may be attracted to venture capital as a way of balancing their portfolios.
Pension Funds and Endowments
Pension Funds are entities that capture, invest and then pay out capital to employees, employers or both. Pension funds generally cluster around specific large companies (or governments), and are more common in industries that have been around for a longer time. Because pension funds have to pay out when eligible employees retire, they are focused on ensuring returns sufficient to accomplish that goal over the medium term. They often make higher-risk investments to ensure optimal returns, but are generally very regulated and strictly regimented. Endowment funds are similar in most respects to Pension Funds, but may be limited to serving one particular entity.
Sovereign Wealth Funds
Sovereign Wealth Funds (SWFs) are those state-owned entities that invest capital on behalf of the leadership and/or their citizenry. Operating at various degrees of transparency and autonomy, SWFs frequently source deals from around the world, with a close eye on the political implications of their investments.
Because any qualified individual or entity can be an LP in your fund, it’s incredibly important to have a clear plan of attack for getting your first close. VC Lab is a free accelerator that provides structure and guidance to build your venture fund. Find out more here, and apply to join one of our coho
What is the ideal LP for my fund?
The ideal limited partner is an individual or entity that aligns with your vision, can commit to the required capital size, and is willing to write a check.
It’s generally good practice to keep your options open until you’ve soft circled the funds for your first close. However, you should not cast a wide, unstructured net for capital. Doing so will simply dilute your effort and is unlikely to produce results. Furthermore, because of restrictions on general solicitation (asking for capital), it is imperative that your process comply with local laws and regulations. Doing so invariably means not broadcasting your fund’s intentions, thesis or anything that can be construed as seeking investment.
All that having been said, your fund’s thesis and concomitant risk profile necessitate focusing on LPs that can and want to take advantage of your unique vision. In addition to qualifying them as likely investors, you need to make sure they are aligned with your perspective and that you have good rapport. Though you are not going to be talking to them every day, your LPs will be with you for a long period of time, and you will need to make several capital calls and raises. Therefore, make sure that your LPs are people you vibe and communicate with effectively.
Understanding how to match your intentions to the right LPs without running afoul of regulation is complex. The VC Lab accelerator provides a free set of tools, information, mentorship and community designed to help you build, launch and grow your VC fund on your terms. Find out more here, and apply to join one of our cohorts today before the deadline.
How do I Plan my Fundraising?
Plan your Venture Fundraising by analyzing your network, prioritizing those who are closest and more likely to invest, and by giving yourself tangible milestones (such as your minimum investment size) to work towards.
Running a fundraising campaign requires clear planning and organization. The universe of potential LPs is vast and complex, and your time is limited. The goal of the fundraising plan is to get you from start to your first close as quickly as possible, so you can begin the principal work of your fund: investing in companies.
A good fundraising plan starts with a thorough analysis of your network, and a prioritization of potential investors. A prioritized target list must first and foremost consider how “close” the target is to you. Have they worked with you before? Are they friends or family members who know your track record? How about advisors, mentors and past investors? Though you still cannot generally solicit those prospects, knowing who you most want to talk to and engaging them in regular dialogue will help you get to first close faster.
Your fundraising plan also needs to have some tangible milestones, which will then be communicated to prospects. This includes the first close date and minimum first close amounts – that is how much capital you need to raise before it triggers the first close cycle.
Expect to spend several months fundraising for your first close, and leverage tools like those provided as part of VC Lab’s free accelerator program to speed up the process. Also, VC Lab’s Cornerstone LPA can help you lower legal and compliance costs, making first closes smaller and more flexible. Find out more about all the resources available here, and apply to join one of our cohorts today before the deadline.
How do I Find LPs?
To Find LPs without breaking the law, you should create interesting content, engage with others in the community, host virtual events, speak or mentor at accelerators and pitch friends and family.
Since you can’t generally solicit to raise money from Limited Partners, the process for finding and closing LPs takes on an additional level of complexity. Bulk email, direct advertising and even pitch content is a definite no-no. Here are some approaches to finding LPs that have worked for VC Lab alumni.
Create Interesting Content
Create Interesting Content. Get into the habit of writing and composing videos every week. Ensure the content is focused on your thesis/vision, and start with a single post each week. Create and share this post on LinkedIn, and syndicate it to your other social channels and content discovery platforms. Each week should have a topic, and consistency is key – posting regularly tells your followers to expect content from you, and primes them to listen/read.
Engage with Others
Engage with Others. If you’re creating one post/video per week, you should be commenting or engaging with others at least 5 times. Simply commenting, asking questions, leaving feedback, etc can help prompt a more balanced social dialogue. This will foster connection and make it easier to bring folks into your orbit. Prioritize those who are potential targets and make sure they know you’re following them.
Host Virtual Events
Host Virtual Events using tools like Airmeet or Zoom to gather interesting folks together. You can pair this with your content and commentary agenda above to foster dialogue about the thesis topics that will drive LP conversion. Get a guest speaker to talk – ideally someone who is a potential target – and they will help drive more people to your channels.
Speak or Mentor
Speak or Mentor at startup accelerator programs like Founder Institute. These are a great way to meet other investors and entrepreneurs in your local ecosystem. In addition to getting the benefit of deal flow from the accelerator cohorts, you’ll be networking with others who can help you fundraise. If you’re more comfortable with public speaking, you can also pitch live and virtual events in your region with relevant talk topics. Though you won’t get paid for this, a well-aligned conversation can bring more LPs into your orbit by establishing your thought leadership.
Carefully Pitch Friends and Family
Carefully pitch Friends and Family without violating general solicitation regulations. Make a point of reaching out to 20 people each week, and ask for advice, assistance or input as the catalyst. Once they understand your strategy, ask for referrals or introductions to others who might be interested.
In every case, the discipline of following a structured process will help you get closer to your goal of a first close. This is precisely the reason we created the VC Lab accelerator program and offer it for free. Structure, guidance, mentorship are all critical success factors, and we want you to change the world. Find out more here, and apply to join one of our cohorts. You’ll need a referral to be considered, and you can apply the lessons of this post to accomplish that.
How Many LPs Do I Need for my Fund?
The ideal number of limited partners is between 25 and 35, but some funds launch successfully with many fewer depending on ticket and fund size.
Typically, high net worth individuals will commit between $100K and $1M over a fund’s lifetime, while family offices may have a $500K minimum. By working backwards from your desired first close, you can estimate the number of investors required to make it work.
Some investors will seek an exception to come in below your minimum bite. You can choose to do this strategically to bring someone onboard who might otherwise be a good referral source. You may also want to set your minimum investment size lower, depending on your region and network.
Sometimes, rounds are taken by much fewer investors with much larger appetites. This is a good problem to have if you’re a first time GP, but still comes with some potential areas of concern. Particularly, with fewer GPs you have a greater dependence on each one, making your outcomes more dependent on their engagement and success.
Conversely, having 100 investors at $10K doesn’t help most first time GPs either. Though it can be tempting to take whatever money you can get, remember that each of these investors will be part of your stakeholder set for a long time, and you’ll have to manage their money for 10+ years. Though VC Lab tools like the Cornerstone LPA dramatically reduce the cost of each closing and LP onboarding, there are still time and opportunity costs to consider.
A comprehensive view of LP targeting, sizing and strategy is one of the bedrock learnings from VC Lab’s Accelerator Program. Based on decades of experience and continuous learning from alumni, targets and approaches are continuously refined. When paired with mentorship and community support, provides an unparalleled structure for first-time fund success. Find out more about all the resources available here, and apply to join one of our cohorts today before the deadline.
How Do I Size My Fund?
Determine your fund’s ideal size by factoring in your thesis, the size and strength of your network, and your first close dollar target. The goal is to define an MVF – Minimum Viable Fund – and aim for that target.
If your thesis requires an obviously large amount of capital (e.g. space exploration or fundamental research in particle physics), it’s unlikely that LPs will believe you can make a difference with $5-10 Million. However, over the lifetime of your firm you can raise multiple funds, e.g. a $10M fund at first, $20M on fund 2 and $50 or $100M on fund 3. Ultimately, you need to sell the vision, and must make sure the thesis and the fund size match logically.
Similarly, you must assess your fund size based on how likely you are to be able to close capital. In order to get your first close going, you need to meet your minimum commitment levels. Even 90% of the goal will likely result in your fund not closing. So you have to consider the network strength and achievability. You’re better off doing a $1M first round that you can actually close, vs a $5M first round that never gets across the finish line. If you have a robust, healthy network – raise more.
As a general rule, your first close should be 20% of your fund’s first target. So if you want to launch a $10M fund, you need to raise approximately $2M in the first round. Consider all the variables listed above and set the number at reasonable, logical and achievable.
Modeling your fund is one of the most complex and important skills a GP can have. This is core to the VC Lab accelerator’s approach to getting the first fund off the ground: a laser focus on helping you achieve that milestone while ensuring compliance and impact. Find out more about how we can help you, and apply to join one of our free cohorts today before the upcoming deadline.
How Do I Pitch My Fund?
To successfully pitch your fund, you’ll want to follow a proven pitch template, focus on your vision and mission, explain your track record/traction, and ensure compliance with regulatory requirements.
If you’ve had experience pitching a startup, pitching a fund is both similar and different. It’s important to understand and leverage your experience when relevant, but also to avoid some of the pitfalls of overconfidence.
First, follow a template. There are several topics that LPs really want to hear you cover, including your background, thesis, team, market, fund traction-to-date and deal flow strategy. You can improvise and go off piste, but it is helpful to start with a vetted presentation framework.
Though it seems stereotypical, LPs looking to invest in first-time funds are going to be primarily motivated by alignment with your mission and vision – while always focusing on expected returns. As a first time fund manager, you won’t be able to speak to the track record of your returns, however you can draw parallels between what you’ve done in the past and the probability of your success in the future.
Most importantly – do your research and engage in dialogue. Before you go into any fund pitch meeting, you should have a good idea of what the LPs focus and motivations are, and you should be predisposed to listen carefully once face to face. A good starting point here is to look for the points of alignment and go from there.
And, of course, in the background are the various regulatory hurdles you need to clear and compliance you have to maintain. For this reason and the others listed above, learning from others and following a process will yield the optimal result. That’s how we’ve structured the VC Lab accelerator: leveraging dozens of years and hundreds of funds’ experiences to speed up and optimize your close. Find out more here, and apply to join the free program before the upcoming deadline.
How do I Do My First Close?
You can successfully close your first round by carefully analyzing your soft and hard circled capital, coordinate among investors, and ensure that you’re showing momentum at every step.
As you approach your first close, it’s important to have a really good understanding of your LP pipeline and traction. This is to ensure that you can both coordinate your side of the equation and also to project the timeline to prospective investors.
Money that is pledged to your fund is said to be “soft circled” or “committed”. Soft circling means that someone has given you a general indication of interest and has also indicated the amount they are willing to invest. Committed typically means a firm agreement to invest has been reached, and documents (such as the Cornerstone LPA) are either signed or in-hand.
To get your first close done, you’ll need to coordinate your soft circled and committed investors and wrangle them across the finish line. Moreover, you’ll have several logistical challenges, including legal, regulatory and accounting issues. Because a first close can often cost north of $100,000 in legal fees, it’s exceptionally important that you make smart choices and trigger costs only when you know the close is going to happen.
Or you can take advantage of tools and resources like VC Lab’s Cornerstone Launch Program – a comprehensive, streamlined and low-cost approach to establishing, capitalizing and managing your fund. Together with the Cornerstone LPA – an optimized and simplified Limited Partner Agreement – the Fund in a Box helps first time fund managers get up and running quickly and affordably. Join the next cohort of VC Lab’s free accelerator program to get access to these resources and more – but a
How Do I Show Traction?
You can show traction as a first-time manager by ensuring you communicate the wins (and losses) to your LPs – both current and prospective – while also ensuring your thought leadership program is out in front.
Traction matters as much to prospective LPs as it does to investors in startups. You need to show that you’re growing, raising more capital, getting deal flow, etc. In the early stages, LPs are more likely to be sensitive to momentum around other investors. In later stages, they will shift focus to deal flow and eventually liquidity.
The key to showing momentum is to stay in constant communication with your prospecting, soft-circled, committed and even rejected LPs. Begin a regular communication process such as a monthly newsletter where you can share new insights (e.g. your thematic posts or articles) and also give updates on your fund.
For insiders – those that have invested – you may want to also plan short touch-bases, particularly as you approach first close. Keep everyone mostly in the loop about how things are going – be transparent and forthright – and you’ll establish trust early in the game. It’s always better to take longer but meet the goal when fundraising than to move quicker while undershooting.
As you move through the process of ideating, pitching, closing and managing your first fund, the relationships with your LPs will make all the difference in your success or failure. That’s why the goal of the VC Lab accelerator is to remove roadblocks and streamline processes so you can focus on the important, relational activities – while receiving mentorship, guidance and software to support your launch. Join the next cohort of the free accelerator program before the next deadline.