Securing Limited Partners is a formidable task that demands persistence, meticulous research, and strategic networking. For the average fund, this means courting nearly 250 LP prospects and pitching to a majority of them, only to culminate in a select few actual commitments. This article elucidates the exhaustive process, underscoring the challenges and providing a roadmap to effectively source and close LPs in the investment realm.
Researching LPs
Sourcing potential Limited Partners necessitates the usage of multiple research platforms. These platforms, whether digital tools or networks, provide data and insights about potential LPs, their investment behaviors, and affiliations.
- LinkedIn: A hub for professionals, it can identify LPs by job titles, backgrounds, and company affiliations.
- CrunchBase: This platform offers insights into businesses and their associated stakeholders, ideal for locating previous investors.
- AngelList: Geared towards startups, it provides data on venture capitalists and angel investors.
- Professional Networks: Industry-specific groups or associations can have directories to identify potential LPs.
- Alumni Networks: Educational affiliations can reveal potential LPs, as many alumni invest in ventures related to their alma mater.
- Coworkers: Past and current colleagues can offer introductions or insights on potential LPs.
- Web Searching: General internet searches using specific keywords can lead to potential LPs or their affiliations.
Incorporating a variety of these platforms into a research strategy can enhance the depth and breadth of potential LP discovery, creating a solid foundation for the engagement process.
Keywords for LPs
Researching LPs is difficult. Most do not self identify, and there are fake LPs, seeking attention and opportunities, as well as inactive LPs.
Identifying real LPs requires searching with a combination of less obvious keywords, such as “Multi-Family Office Chief Investment Officer”, on LInkedIn, and then carefully filtering the results by individually researching each person. Many don’t invest in VC. Looking at what Boards they serve on, their interests, or their investments are obvious signals, but some of the largest LPs are mostly silent online. 1 in 20 in a well formatted search might actually be a LP due to the high level of noise.
Here are some keywords to use in different categories to start searching for LPs:
Job Title
- Chief Investment Officer
- Investment Director
- Institutional Investor
- Angel
- Venture Partner
- Exited Entrepreneur
Background
- Private Equity
- Angel Investing
- Private Investing
Company Description
- Investment Firm
- Family Office
- Fund of Funds
- Endowment Fund
- Hedge Fund
- UHNW (Ultra High Net Worth)
- Acquired
LP Archetypes
- Personal Friends: These individuals, often within the social circle of a venture capital fund’s general partners, invest in the fund based on trust and rapport. They believe in the expertise and judgment of the general partners and may provide additional resources or connections to support the fund.
- Angel Investors: Wealthy individuals who invest in startups at an early stage and may also invest in venture capital funds to gain access to a broader range of investment opportunities. Their experience, mentorship, and connections can be valuable for the fund and its portfolio companies.
- Alumni Networks/Affinity Networks: Individuals connected through shared educational or professional experiences, such as alumni of prestigious universities or members of industry associations, may invest in venture capital funds as part of their broader investment strategies. These networks can provide access to a diverse pool of potential LPs who share common values, experiences, or interests, and can contribute valuable connections, resources, and insights to the fund and its portfolio companies.
- Tech Executives: High-ranking professionals within the technology sector invest in venture capital funds to leverage their industry insights, connections, and expertise. They can identify and support the next generation of technology-driven startups, making them valuable partners for the fund.
- Small Business Owners: Entrepreneurs who have built successful small businesses often invest in venture capital funds to diversify their investment portfolios and contribute to the growth of innovative companies. Their unique perspectives on business operations and customer needs can be valuable for the fund and its portfolio companies.
- Exited Founders: These successful entrepreneurs have built and sold their own companies, and now seek to invest in new ventures. They bring valuable experience, industry knowledge, and connections to the table, making them attractive partners for venture capital funds.
- High Net Worth Individuals (HNWIs): Wealthy individuals interested in diversifying their investment portfolios often turn to venture capital funds. They may have personal interests or expertise in specific industries, which can add value to the fund and its portfolio companies.
- Family Offices: Representing wealthy families, these private wealth management firms invest in venture capital funds as part of their diversified investment strategy. They aim to grow and preserve the family’s wealth while contributing to the success of innovative companies.
- Bankers: Financial professionals with deep knowledge of finance and investment strategies may invest in venture capital funds to capitalize on their industry connections and expertise. Their background in finance can be an asset for the fund and its portfolio companies.
- Corporations: Large companies interested in investing in venture capital funds to gain exposure to emerging technologies and trends, as well as to identify potential strategic acquisitions or partnerships. Corporate LPs can provide valuable industry insights, connections, and resources to the fund and its portfolio companies.
- Corporate Venture Capital (CVC): Large corporations that invest in venture capital funds to gain access to emerging technologies, trends, and potential strategic acquisitions. Their industry expertise, resources, and connections can help accelerate the growth of portfolio companies.
- Venture Capital Firms: Established VC firms may invest in other venture capital funds, particularly those with a specialized focus or unique investment thesis. This can provide them with access to a broader range of investment opportunities and the ability to co-invest in deals that align with their own strategy. Investing in other funds can also be a way for VC firms to diversify their portfolios and share risk.
- Next Generation Wealth: Offspring of wealthy families, these individuals seek to establish their own investment track record and contribute to the growth of innovative companies. Their family connections and resources can be valuable for the venture capital fund.
- Fund of Funds: These investment firms focus on investing in other funds, including venture capital funds. They seek exposure to a diverse range of startups and industries through their investments, while offering additional resources and expertise to the funds they invest in.
- Sovereign Wealth Funds (unlikely for Fund I): State-owned investment funds that invest in various asset classes, including venture capital. They aim to generate long-term returns and support their nation’s economic development, offering significant capital and a long-term investment horizon.
- Endowments (unlikely for Fund I): Institutional investors like universities and foundations invest in venture capital funds to support their missions and generate returns that sustain their operations. They often have long-term investment horizons and can provide stability to the fund.
- Insurance Companies (unlikely for Fund I): These organizations invest in venture capital funds to diversify their investment portfolios and seek higher returns compared to traditional fixed-income investments. Their experience in risk management can be an asset for the fund.
- Pension Funds (unlikely for Fund I): Institutional investors managing retirement savings for employees, these funds invest in venture capital funds to diversify their portfolios and generate long-term returns for their beneficiaries. Their large asset base and long-term investment horizon can be beneficial for the venture capital fund.
Develop Personas for Targeted LP Archetypes
Once you’ve identified three LP archetypes that align with your fund’s goals, create detailed personas for each. This will help you better understand their motivations, pain points, and interests, allowing you to tailor your outreach and communication. When developing personas, consider the following factors:
- Background and professional experience
- Investment history and preferences
- Personal interests and values
- Network and connections
Sample Persona for an LP Archetype (Exited Founder): Simon Thompson, an exited founder, made his fortune after successfully selling his e-commerce startup to a tech giant. A software engineer by trade, he ventured into entrepreneurship in his mid-30s, building a revolutionary platform that streamlined online retail experiences for both consumers and businesses. As a limited partner in a venture capital fund, Simon is particularly interested in backing startups that leverage cutting-edge technology to transform traditional industries. With a keen eye for innovation and an impressive network of industry connections, he adds immense value to the fund beyond his financial contributions. In his personal life, Simon is a passionate advocate for education and workforce development, actively supporting initiatives that empower underrepresented communities in the tech industry. Balancing his roles as a mentor, philanthropist, and investor, Simon is driven by a desire to create meaningful impact and help shape the future of technology.
Sample Persona for an LP Archetype (Corporation): Natalie Johnson is Head of Strategic Partnerships at GreenTech Solutions, a leading clean energy corporation. She is responsible for identifying and fostering relationships that can drive the company’s growth and innovation. With over 15 years of experience in the energy sector, Natalie has built a reputation for her ability to spot emerging trends that shape the industry’s future. As an LP in a venture capital fund, she is particularly interested in discovering promising startups that could lead to strategic partnerships, joint ventures, or acquisitions for GreenTech Solutions. In her personal life, Natalie is a devoted advocate for environmental sustainability and social responsibility. She frequently speaks at industry conferences and mentors young professionals entering the clean energy sector.
Helpful Tip: Utilize Chat GPT to develop comprehensive LP personas by providing a detailed prompt, such as: “Create a persona for a high net worth individual interested in investing in a venture capital fund focused on clean energy. Include background, investment history, personal values, and network connections.” This will help you obtain a well-rounded persona that can guide your outreach strategy.
Create Target Lists of Actual LPs
With personas in hand, start building a target list of potential LPs for each archetype. Leverage your network, industry events, and platforms like LinkedIn to identify individuals and organizations fitting your criteria. Keep track of your prospects in a spreadsheet or CRM, including their contact information, relevant background, and any mutual connections.
Helpful Tip: Prioritize LPs with a history of investing in funds with similar Thesis or focus areas as yours. This demonstrates an existing interest and may increase the likelihood of a successful partnership.
Test Receptiveness
Before launching a full-scale outreach campaign, test the receptiveness of each LP archetype by engaging a small sample from your target list. Prepare a compelling pitch that highlights your fund’s unique value proposition, investment thesis, and team credentials. Tailor your pitch to address each archetype’s specific interests and motivations, based on the personas you developed.
Helpful Tip: Test different communication channels (e.g., email, phone, LinkedIn) and messaging styles to determine which resonates best with each archetype. Track engagement metrics such as open rates, response rates, and meeting conversions to measure effectiveness.
Refine Your Approach
As you engage with potential LPs, it’s essential to continuously refine your approach to ensure optimal results. Regularly assess your interactions with each LP archetype to identify areas for improvement or optimization. Make necessary adjustments to your pitch, communication style, or outreach channels based on the feedback and responses you receive.
It’s also crucial to be aware of the limitations and potential pitfalls of pursuing certain LP archetypes. Some may consistently produce small checks or lose interest in your fund over time. In such cases, it’s important to recognize when to stop pursuing an archetype that’s not yielding the desired results. Instead, shift your focus to new LP archetypes that may align better with your fund’s goals and investment thesis.
During this iterative process, maintain a balance between persistence and adaptability. Understand that building strong LP relationships takes time, and you may need to explore various archetypes before finding the right partners. Continuously analyze the performance of each archetype and replace underperforming ones with newer, more promising alternatives. This approach will help you maximize your chances of success while ensuring that your fund is supported by a diverse, committed group of LPs.
Helpful Tip: Use analytics tools to track and measure key performance indicators (KPIs) such as response rates, meeting conversions, and average investment size, enabling data-driven decision-making when refining your approach.Helpful Tip: Stay informed about industry trends, news, and events that may impact LP interests or preferences, and adjust your pitch and outreach strategy accordingly to maintain relevance and resonance with your target audience.
Connectors to LPs
Connectors are individuals or entities that are 1st degree connections of the manager who have strong 1st degree connections to Limited Partners. They bridge the gap between managers and potential LPs, making trusted introductions to potential LPs.
To identify Connectors, managers review friends, alumni, past colleagues, industry acquaintances, or professionals met at conferences. Use LinkedIn to see if they have 1st degree connections to any Limited Partners on the LP target list.
For Connectors with strong relationships with target LPs, managers set up a meeting. The goal of the meeting is to catch up and share what each party is working on, including the fund. If the meeting is going well, the manager asks if the Connector is open to helping to make any introductions, and the manager also offers to help the Connector with anything.
Connector Best Practices
Connectors play a vital role in fundraising for venture capital funds. Here are some best practices:
- Offer to Help: Help a Connector with something that they need first to demonstrate that it is a mutually helpful relationship
- Keep Up-to-Date: Inform the Connector of the status of any introductions so that they can help close
- Measure Success: Track which Connectors are generating the most referrals and closes for deeper engagement
- Send a Newsletter: Keep Connectors on the monthly newsletter so that they know more about the fund
- Check in Quarterly: Organize a short check-in call quarterly with the best Connectors to find new leads
- Invite to Events: Invite the strongest Connectors to LP events and other industry functions
General Solicitation Considerations
In many countries around the world, managers are prevented from soliciting investment from people that they do not know and from people that are not wealthy. It is important that the manager understands the general solicitation rules and helps the Connector follow the rules, as well. To this end, the Connector can introduce the manager individually without mentioning the fund.
Compensating Connectors
Compensation should avoid triggering broker-dealer regulations. GPs shouldn’t offer, nor should Connectors seek, a percentage of capital raised. Alternative compensations can include dinners, business assistance, prioritizing introductions, or considering them for a venture partner role, provided it’s not tied to capital raised.
LP Construction
Venture funds usually employ a phased approach when securing commitments from Limited Partners. The First Close often captures between 10% to 25% of the target fund size.
Funds attract smaller investors at first that are normally close to the managers, followed by larger investors later on after the fund has operationalized. This is, in part, a de-risking strategy by larger LPs, and it also often takes larger LPs more time to close.
Managers are advised to set up a fund closing model with targets that include monetary goals and LP Archetypes. Using the example of a $10 million fund, the fund closing model might look like this:
$1 MM LPs: 2 for $2 MM
- Family Offices: These firms represent wealthy families and invest to both preserve and grow the family’s wealth, often having access to significant resources.
- Fund of Funds: Investment firms that focus on backing other funds, offering access to a broad range of startups and industries, and providing resources and expertise to the funds they invest in.
- Corporate Venture Capital (CVC): Corporate entities looking to invest in emerging trends and technologies, bringing industry expertise and significant resources.
$500K LPs: 6 for $3 MM
- Exited Founders: Entrepreneurs who have previously built and successfully exited businesses, bringing with them vast experience and potentially beneficial connections.
- Tech Executives: Individuals at the forefront of technological advancements, bringing industry insights and a deep-rooted network.
- Next Generation Wealth: Younger individuals from wealthy lineages aiming to carve their own investment legacy, potentially leveraging their family’s resources and connections
$250K LPs: 12 for $3 MM
- High Net Worth Individuals (HNWIs): Wealthy individuals seeking diversification and possibly harboring a personal interest in sectors the fund might target.
- Bankers: Those from the financial sector, potentially offering a robust understanding of finance and a vast network.
- Venture Capital Firms: Larger VC firms may participate, especially if the new fund offers a unique access to trusted dealflow.
$100K LPs: 20 for $2 MM
- Personal Friends: Investing based on deep trust and belief in the general partner’s acumen and potential.
- Alumni Networks/Affinity Networks: Professionals united by common educational or professional backgrounds, offering shared values and a myriad of connections.
- Angel Investors: Well-to-do individuals seasoned in backing startups, and who might be looking to diversify through a venture fund.
LP Closing Process
Closing a Limited Partner involves a number of steps and can often take multiple months, sometimes even years. A rough outline of the closing process is below:
- Source the LP: Conduct basic research around likely LP Archetypes to find a list of 150 to 500 Limited Partners to target for a full fund closing. This sourcing is an ongoing process over months during the full fund closing.
- Meet with the Connector: Arrange a meeting with your identified Connector. In this meeting, discuss what you are working on and ask if the Connector can help identify any LPs, sharing the names from your research.
- Secure an Introduction: If the Connector believes a suitable LP is in their network, ask them to facilitate an introduction. Ensure this introduction focuses on you or your team rather than directly mentioning the fund or Thesis.
- Hold an Initial Meeting: After a successful introduction, set up a meeting with the potential LP. This meeting aims to build rapport and establish a relationship before pitching to comply with general solicitation rules..
- Hold Pitch Meetings: Once a relationship is established and the LP is qualified, organize pitch meetings to present the fund. In this meeting or meetings, describe the Thesis with your value add and address any questions.
- Provide Materials: It’s likely that the LP will request further information or documentation either before or after the meetings. It is recommended that the manager secure a non binding commitment letter, a PACT, before sending materials.
- Secure a PACT Commitment: When an LP expresses interest, requests materials, asks for Data Room access, or seeks multiple meetings, the manager asks the LP to sign a PACT to indicate their investment interest. This “hard circles” the LP as a serious investor.
- Respond to Due Diligence: Larger and more serious LPs will complete due diligence and review the fund Data Room, which includes fund materials, legal agreements, portfolio company information, team biographies, and references.
- Complete a Legal Review: Lawyers from the LP will review the LPA and may ask for a Side Letter to secure special terms. The manager normally coordinates the answers to legal questions and negotiates against any special terms.
- Sign the Agreements: Once the questions are resolved and any special terms are negotiated away, the manager sends the LPA to the LP for signature. Depending on the LPA, the Subscription Agreement and LPA may be hundreds of pages and complex to sign, taking days.
- Complete a Capital Call: After signing, the LP is sent a Capital Call to send in a percentage of their commitment that catches them up to the level of all other LPs in the fund. It is normal for managers to call 20% or 25% on first closing.
Setbacks
A common LP scenario in venture capital is called “LP Love.” This term captures the tendency of some Limited Partners to engage fund managers extensively, consuming substantial amounts of their time without ever saying “yes” or “no.” While LP Love can be a genuine drain on resources, it is one of several setbacks in the LP closing process.
- Seasonality: Investment cycles and fiscal year-ends can influence LP decisions. For instance, an LP might delay decisions due to vacations or a forthcoming budget.
- Changing Market Conditions: Sudden market volatilities or economic downturns can prompt LPs to reconsider their investment strategies, pushing commitments to the future.
- Shifting Industry Trends: Evolving trends in the industry can divert an LP’s focus. A surge in a new technology or a decline in a particular sector’s prospects influence LP decisions.
- Internal Problems: Challenges within the LP’s organization, such as leadership changes or strategic overhauls, can stall or terminate potential investments.
- Liquidity Setbacks: Even if an LP is interested, they might face capital constraints or other liquidity issues that prevent them from committing.
Recognizing these potential setbacks early can equip fund managers with strategies to navigate them, ensuring smoother LP engagements and mitigating prolonged periods of uncertainty.
LP Rejections
LPs rarely say, “no,” but they do say things that tell you their answer is a “no.” In venture, anything that is not a “yes” is a “no,” and here are some examples of things that LPs say which effectively mean, “no”:
- Delayed Response: After multiple follow-ups, the LP might remark, “I’ve been swamped lately and haven’t had a chance to review.”
- Resource Constraints: They might mention, “We are currently overallocated in venture, and I will let you know when this changes.”
- Alternative Investments: The LP could note, “We’re currently exploring some other opportunities that align closely with our focus.”
- Strategic Shifts: A common indication is, “Our investment focus is undergoing some changes right now.”
- Seeking More Data: By saying, “Can you provide more detailed projections?”, the LP might be stalling the decision.
- Concern Over Team: A subtle hint could be, “How experienced is your management team with ventures of this scale?”
- Market Concerns: An LP might remark, “The market seems quite saturated; how do you plan to differentiate?”
- Return Potential: Expressing concerns like, “The projected returns seem optimistic given the risks,” indicates hesitancy.
- Fit with Portfolio: An LP might say, “We typically invest in different sectors or stages.”
- External Advisors: They could note, “Our advisors have raised some concerns that we need to address.”
Recognizing these indirect refusals early can help in redirecting efforts and refining the approach for future interactions.