A good friend of mine recently asked me a question for an article he was writing (Stay tuned for his masterpiece which I’ll be sure to share on socials.): “What makes you more likely to reinvest in Fund II or III?” Which is a really good question and something I’ve been thinking out more and more in the past few months as a number of my bets have come back to me for that conversation.
Before I share my thoughts in full here, couple caveats:
- I’m a small check. Let’s never forget that fact. Whether I invest in the fund or not, it will not make a meaningful dent in the final fund size. But it looks great when X% of your LPs re-up into the next, and some GPs like to highlight which.
- I’m a nobody. If you’re a friend reading this piece, I know what you’re going to say, but in the grander scheme of things, I’m a nobody. And hopefully some day, I will be a somebody, but that’s not the reality today. Meaning unless you don’t have any real institutional backing who’s committing to a re-up, my name reasonably won’t impact your ability to raise your next fund. Two reasons:
- Again, see Exhibit 2’s first sentence.
- If a manager in my portfolio is about to go back to market, I would have known months, possibly a year, ahead of the raise. And by that time, I would have put you in touch with many of the LPs in my network at that point. So, anyone who does know who I am would have already met with said GP before the fundraise, and any namedropping of my name would be old news by the time they see the deck.
Alright, I’ve delayed my answer long enough.
So there are few things I look for, opportunistically, though some more intentionally than others. And in no particular order:
- Are the people I meet through the GP impressive and/or thought-provoking and/or thoughtful people?
- This includes the founders they back. The founders they think about backing and ask me to help them diligence. The people they plan to hire or have hired. Other LPs in the same fund. Friends of theirs I meet over game night. Their spouse we do a double date with. Again, all of these are casual connections for the most part. And no, I am not assessing with a clipboard, binder, and monocle every single person I meet via the GP. But my rough litmus test here is: Do I feel more inspired, less, or net neutral when I interact with the afore-mentioned individuals?
- Over time, do I gain more conviction in my initial bet on the manager or less? Am I getting more and more impressed with the manager’s ability to grow and learn over time?
- What does the quality of revenue, talent, funding, and milestones in the underlying portfolio look like? How involved has the GP been in each company’s revenue, talent, funding, and milestones? How much of their portfolio company’s success did they will into existence?
- I should note that this really matters when you want to build an institution. In almost all ways, the fund I initially invest in should be the worst version of the firm that anyone ever has to see again. Each fund should get better than the last. Each fund should have more surface area for luck to stick than the last. And one of the most reliable ways of doing so is to be there for your companies when they need it. And for your founders to be grateful for your support.
- Did the GP do what they said they were going to do? If not, how much were they off and why?
- Not everything goes your way I get it. Ideally, as an LP, things do. But the second best result is that it doesn’t, but you learn some really powerful lessons that sets you better up for the next fund.
- With the next fund, does the strategy change significantly? Does the team change significantly? Does the fund size grow dramatically?
- When making non-GP or partner hires, are you outsourcing responsibility and learning or mentoring the next generation?
- For fund size, I don’t have hard numbers I look at, but growing from a $10M to a $25M to a $50M fund is reasonable. But going from a $5M to $100M is not.
- Over the course of the last two or so years, have I met someone who is a lot more impressive than the GP I’ve already backed?
- Admittedly, marginally better is not enough for me.
- Is my communication line with the GP still as strong (ideally stronger) than when I initially committed?
- I’m not here to bug a GP every single week or even every single month. And I am always aware that I shouldn’t be taking too much time up from a GP for a selfish reason. But if I do need to make a call, email or text, how quickly do they get back to me?
- Five years from now, can I confidently say this person is one of the top 5 most impressive people I’ve met in the last five years? What about 10 years from now?
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