Ok, before y’all rise up in arms, hear me out. And if by the end of this blogpost, you still want to bring the pitchforks and torches, so be it.
Generally, I get it. Who else is investing isn’t usually a great question. Because for most investors who ask this question, it means they’re outsourcing their conviction.
POV: you're at a tech week event full of contrarian investors who back founders at the earliest stage in frontier industries pic.twitter.com/k7p1cVNHjs
In fact, I wrote a quick LinkedIn (and tweet) post about it the day before yesterday. Which admittedly got a lot more attention than I expected. And if you have the time, it’s worth seeing the discussion on that post that ensued.
So, potentially hot take, I believe investors should ask the question. Who else is investing? It’s part of the diligence process. That said, when they ask that question is key. There’s a vast ocean between the shores of asking that question before you reach conviction and after.
If you pop the question before you reach conviction, well, we’ve seen the follies of that. Most evidenced by the manic rush of 2020 and 2021 into “hot deals” largely led by names that grew to popularity around the dinner table.
If you pop it after, it’s diligence. Where the availability of names shouldn’t convince you to bat or lack thereof to otherwise. But that you now have additional opportunities to reference check and cross-diligence the same opportunity. And it extends to the LP side as well. Jamie Rhode who’s now at Screendoor, said on a Superclusters episode that one of her greatest lessons as an LP was committing to a fund where there was a bunch of soft commits but far less in hard commits, and ended up overexposing Verdis (where she was at) to a single asset and taking a much higher ownership as an LP into a single fund.
Truth is, LPs pay GPs for their opinion. Not anyone else’s. And while given long feedback loops, no one really knows what’s right and what’s wrong except over a decade later and only in hindsight, you have to really believe it, and be able to back it up.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Voila, the fourth installation of 99 soundbites I’ve been fortunate enough to collect over the past year. The first four of what I imagine of many more to come. Each of which fall under one of the ten categories below, along with how many pieces of advice for each category:
You can also find the first three installments of 99 pieces of advice for both founders and investors here. Totaling us to a total of 396 pieces of advice.
But without further ado…
Fundraising
1/ If you’re an early stage startup, expect fundraising to take at least 3-4 months to raise <$1M. If you’re on the fast side, it may take only 2 weeks. – Elizabeth Yin*timestamped April 2022
2/ If you’re going to raise a round over 6-12 months, it often doesn’t seem fair that your first commits have the same terms as those who commit 6 months later, since you’ve grown and most likely have more traction at the time. As such, reward your early investors with preferred terms. Say you’re raising a $1M round. Break the round up to $300K and $700K. Offer a lower cap on SAFEs for the $300K. “Tell everyone that that offer will only be available until X date OR until you hit $300k in signed SAFEs. And that the cap will most likely go up after that.” Why? It lets you test demand and the pricing on the cap – to see if you’re cap is too high or too low on the first tranche. – Elizabeth Yin
3/ As a startup in recessionary times, you have to grow your revenue faster than valuations are falling to make sure you raise your next round on a mark up. Inspired by David Sacks and Garry Tan. *timestamped April/May 2022
4/ There’s only going to be 1/3 the amount of capital in the markets than in 2020 and 2021. So plan accordingly. If you’re not a top 0.1% startup, plan for longer runways. Fund deployments have been 1-1.3 years over the past 1.5 years, and it’s highly likely we’re going to see funds return back to the 3-year deployment period as markets tighten. *timestamped May 2022
5/ B2B startups that have the below disqualifiers will find it hard to raise funding in a correcting venture market:
No to little growth. Good growth is at least doubling year-over-year.
Negative or low gross margins. Good margins start at 50%.
CAC payback periods are longer than one year.
Burn multiples greater than 2 (i.e. You’re burning $2 for every dollar you bring in). A good burn multiple is 1 or less. – David Sacks
6/ Beware of “dirty term sheets.” Even though you’re able to get the valuation multiple you want, read the fine print for PIK dividends, simple “blocks” on IPO/M&A, and 2-3x liquidation preferences. Inspired by Bill Gurley.
7/ “This came at a very expensive valuation with certain rights that should not have come with it — like participating preferred, which is they first get their money out and then they participate in the rest, which was OK for the earlier rounds, but not for the later ones.” – Sabeer Bhatia in Founders at Work
8/ In a bear market, public market multiples are the reference points, not outlier private market multiples. Why? Public market multiples are their exit prices – how they return the fund. It matters less so in bull markets. – David Sacks
9/ Don’t trust the “why”, trust the “no.” Investors don’t always give the most honest responses when they turn down a company.
10/ If you inflate your projections, the only investors you’ll attract are dumb investors. They’ll be with you when things are going well and make your life a living nightmare when things aren’t, will offer little to no sound advice, and may distract you from building what the market needs. By inflating your projections, you will only be optimizing for the battle, and may lose the war if you can’t meet or beat your projections.
11/ VCs will always want you to do more than you are pitching. So if you’re overpromising, they’re raising their expectations even more down the road.
12/ Five questions you should answer in a pitch deck:
If you had billboard, what 10 words describe what you do?
What insight development have you had that others have not?
How you acquire customers in a way others can’t?
Why you?
What you need to prove/disprove to raise next round? – Harry Stebbings
13/ The longer you’re on the market, the greater the differential between expectations and reality, and the harder it is over time to close your round. Debug early on in the fundraising process (or even before the fundraising process) by setting and defining expectations through:
Leveraging market comparables. You don’t have to be good at everything, but you have be really really amazing at one thing your competitors aren’t. It’s okay if they’re better than you in other parts.
14/ You should reserve 10% of your round to allocate to your most helpful existing investors. Reward investors for their help. – Zach Coelius
15/ If your next round’s investor is willing to screw over your earlier investors out of pro rata or otherwise. After they leave, the only one left to screw over is you. – Jason Calacanis
16/ “Nobody’s funding anything that needs another round after them.” – Ben Narasin quoting Scott Sandell
17/ “When a VC turns you down for market size, what they are really saying is: I don’t believe you as the founder has what it takes to move into adjacent and ancillary markets well.” – Harry Stebbings
18/ When raising from corporates, be mindful of corporate incentives, which may limit your business and exit opportunities. “I’ve often seen the structure just simply be a SAFE with no information rights. No Board seats. Check sizes that are worth < 5% ownership. No access to trade secrets.” – Elizabeth Yin
19/ LOIs mean little to many investors, unless there’s a deposit attached to it. A customer must want the product so much they’re willing to take the risk of putting money down before they get it. 1-5% deposit would be interesting, but if they pay the product in full, you would turn investor heads. – Jason Calacanis
20/ “The most popular software for writing fiction isn’t Word. It’s Excel.” – Brian Alvey
21/ “Ask [prospective investors] about a recent investment loss, where the company picked someone else. See how they describe those founders, the process, and what they learned. This tells you what that investor is like when things don’t go their way.” – Nikhil Basu Trivedi
22/ “Founders, please hang onto at least 60% of the company’s equity through your seed raise. Series A or B is the first time founder equity should dip below 50%. I’ve seen cap tables recently where investors took too much equity early on, creating financing risk down the road.” – Gale Wilkinson
23/ “One of the worst things you can say to a VC is ‘we’re not growing because we’re fundraising.’ There are no excuses in fundraising.” – Jason Lemkin. Fundraising is a full-time job, but when you’re competing in a saturated market of attention, it’s you who’s fundraising, but not growing, versus another founder who’s also fundraising and is growing.
25/ The goalposts of fundraising (timestamped Oct 20, 2022 by Andrea Funsten):
Pre-seed: $750K-1.5M round
Valuation: $5-10M post (*She would not go over $7M)
Traction:
A working MVP
Indications of customer demand = have interviewed hundreds of potential customers or users
2-5 “Design Partners” (non-paying customers or users)
Seed: $2-5M round
Valuation: $12-25M post (*She would not go over $15M)
Traction:
$10-15K MRR, growing 10% MoM
6-12 customers who have been paying for ~6 months or more, a few that would serve as case studies and references
Hired first technical AE
Series A: $8-15M round
Valuation: “anyone’s guess”
Traction:
$1.5M in ARR is good, more like $2M
3x YoY growth minimum, but more like 3.5x • 12-20 customers, indications of ACV growth
Sales team in place to implement the repeatable sales playbook
26/ Don’t take on venture debt unless you have revenue AND an experienced CFO. – Jason Calacanis
27/ When you are choosing lead investor term sheets:
For small VC teams (team <10ppl): Make sure your sponsoring partner is your champion. Why does investing in you align with their personal thesis? Their life thesis? Which other teams do they spend time with? How much time do they spend with them? When things don’t go according to plan, how do they react? How do they best relay expectations and feedback to their portfolio founders?
For larger platform teams (team >10ppl): Ask to talk to the 3-5 best people at the firm. And when the investor asks you to define “best”, ask to talk to their team members who best represent the firm’s culture and thesis. Why? a/ This helps you best understand the firm’s culture and if there’s investor-founder fit. b/ You get to know the best people on the team. And will be easier to hit them up in the future.
28/ “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” – Abhiraj Bhal
29/ “[Venture] debt typically has a 48-54 month term, as follows: 12 months of a draw period (ballooned to 18 months over the last few years), to which you can decide to use it or not 36 months to amortize it after that 12 months. The lender at this stage is primarily underwriting to venture risk, meaning they are relying on the venture investor syndicate to continue to fund through a subsequent round of financing.” This debt is likely to be paired with language that allow the fund to default if investors say they won’t fund anymore and/or just not to fund when asked. “They typically are getting 10bps-50bps of equity ownership through warrants. Loss rates must be <3-4% for the model to work.” If there’s less than 6 months of runway or cash dips below outstanding debt, then as a founder, expect a lot of distracting calls. – Samir Kaji
30/ The best way to ask for intros to investors is not by asking for intros, but by hosting an event and having friends invite investors to the event. There’s less friction in an event invite ask than an investor intro ask. The reality is that the biggest investors are inundated with intro requests all the time, if not just by cold email too.
Cash flow levers
31/ The bigger your customers’ checks are (i.e. enterprise vs. SMB vs consumer), the longer the sales pipeline. The longer the sales pipeline, the longer you, the founder, has to stay the Head of Sales. For enterprise, the best founders stay VP of Sales until $10M ARR. For SMB, that’s about $1-2M ARR, before you hire a VP of Sales. Inspired by Jason Lemkin.
32/ “‘I have nothing to sell you today — let’s take that off the table and just talk,’ he would say. ‘My goal is to earn the right to have a relationship with you, and I know it’s my responsibility to earn that right.'” The sales playbook of David Beirne of Benchmark Capital fame, cited in eBoys.
33/ “All things being equal, a heavy reliance on marketing spend will hurt your valuation multiple.” – Bill Gurley
34/ If you were to double or triple the price of your product, what percent of customers would churn? If the answer is anything south of 50%, why aren’t you doing it?
35/ Getting big customers and raising capital is often a chicken-and-egg game. Sometimes, you need brand name customers, before you can raise. And other times, you need capital before you can build at the scale for brand name customers. So, when I read about Vinod Khosla’s advice for Joe Kraus: “We had $1 million in the bank and we didn’t know what we were going to bid. We sat down in my office, all on the floor. Vinod said we should bid $3 million. I was like, ‘How do we bid $3 million? We only have $1 million in the bank.’ And he said, ‘Well, if we win, I’m pretty sure we can raise it, but if we don’t win, I don’t know how we’re going to raise.'”
36/ “Your ability to raise money is your strategy. If you’re great at it, build any business with network effects. If you’re bad at fundraising, it’s strategically better to build a subscription business with no network effects.” – Elizabeth Yin
37/ Be willing to fire certain customers (when things get tough or in an economic downturn). If they aren’t critical strategic partners or are loss making, figure out how to make them profitable. If you can, renegotiate contracts, like cheaper contracts for longer durations. If not, let them go. Make it easy to offboard.
38/ An average SaaS business, that doesn’t have product-led growth, is spending about 50% of revenue on sales and marketing. Those that are in hyper growth are spending 60%. – Jason Lemkin
39/ “The only thing worse than selling nothing is selling a few. If you sell nothing, you stick a bullet in it and move on. When you sell a few, you get hope. People keep funding even though it’s really not viable.” – Frank Slootman
40/ If your customer wants to cancel their auto-renew subscription to your product, you should refund them a 100% of their cost. – Jason Lemkin
41/ “Your price isn’t too high. Your perceived value is too low.” – Codie Sanchez
42/ “15-20% of IT spend is in the cloud.” And it’s likely to go up. – Alex Kayyal
43/ If your customers are willing to pay you way ahead of when your service is executed, you have an unfair and unparalleled cashflow advantage. – Harry Stebbings
44/ If you’re in the CPG business, it’s better to negotiate down the contract. “You buy 75, and you sell 60, they’re going to go, ‘Ah, I got 15,000 in inventory, it’s not a success.’ If you give them 40, and then they have to buy another 20, and they sell 60, they go, ‘Wow, we ordered 50 [(I think he meant 20)] more than our original order.’ You’re still at 60, but one, they’re disappointed, and one, they’re not. You’re still playing some weird mind games a little bit so that they feel good about whatever number was there.” – Todd McFarlane
45/ “If you are under 100 customer/users, get 20 of them in a Whatsapp Group. You will:
Get much higher quality feedback, faster, on the current product.
They will be WAY more proactive in suggesting future product ideas and helping you shape the product roadmap.
It will create a closer relationship between you and them and they will become champions of the product and company. People like to feel they had a hand in the creation process.” – Harry Stebbings
46/ Create multiple bank accounts with different banks to keep your cash, to hedge against the risk of a bank run. The risk is very unlikely to occur, but non-zero, especially in a recessionary market. Inspired by SVB on March 10, 2023. More context here, and what happened after here. Breakdowns here, here and here.
47/ “Keep two core operating accounts, each with 3-6 months of cash. Maintain a third account for “excess cash” to be invested in safe, liquid options to generate slightly more income.” – A bunch of firms
48/ “Maintain an emergency line of credit. Obtain a line of credit from one of your core banks that can fund the company for 6 months. Do not touch it unless necessary.” – A bunch of firms
49/ In case of a bank run: “1/ Freeze outgoing payments, let vendors know you need 60 days, 2/ Figure out payroll & let your investors know exactly when cash out, 3/ Attempt emergency bridge with existing investors; hopefully reasonable terms or senior debt (but given valuation reset this is a HARD discussion for many), 4/ Figure out who can take deferred salary on management team, which will extend runway, 5/ Make sure you communicate reality to team honestly so they can make similar plan for their household, 6/ Make sure you talk to HR about legal issues around payroll shortfall — which hopefully this doesn’t come to, 7/ In future, keep cash in 3 different banks.” – Jason Calacanis
50/ “Whenever a CEO blames their bad performance on the economy, I knew I had a really crappy CEO. ‘Cause it wasn’t the economy, it was a bad product-market fit. The dogs didn’t wanna eat the dogfood. Sometimes the economy can make that a little worse, but if people are desperate for your product, it doesn’t matter if the times are good or bad, they’re going to buy your product.” – Andy Rachleff
51/ General reference points for ACV and time to close are: $1K in 1 week. $10K in 1 month. $100K in 3 months. $300K in 6 months. And $1M in 12 months. – Brian Murray
52/ A B2B salesperson’s script from Seth Godin. “Look, you’ve told me you have this big problem you need to solve. You have a five million assembly line that’s letting you down, blah blah. If we can solve this problem together, are you ready to install our system? Because if it’s not real, let’s not play. Don’t waste my time, I won’t waste yours. You’re not going to buy from me because I’m going to take you to the golf course. You’re not going to buy from me because our RFP is going to come in cheaper than somebody else’s. You want my valuable time? I’m going to engage with you, and tell you the truth and you’ll tell me the truth. You’re going to draw your org chart for me. You’re going to tell me other complicated products you’ve bought and why your company bought them. And I’m going to get you promoted by teaching you how to buy the thing that’s going to save your assembly line. Let’s get real or let’s not play.” – Seth Godin
53/ “The job of a pre-seed founder is to turn investor dollars into insights that get the company closer to finding product-market fit.” – Charles Hudson
Culture
54/ Deliver (bad) news promptly. Keep to a schedule. The longer you delay, the more you lose your team’s confidence in you. For example, if your updates come out every other Friday, and you miss a few days, your team members notice. Your team is capable of taking the tough news. This is what they signed up for. Explain a stumble before it materially impacts your bottom line – revenue. Inspired by Jason Lemkin.
56/ “It’s easier, even fun, to do something hard when you believe you’re doing something that no one else can. It’s really hard to go to work every day to build the same thing, or an even worse version, of what others are already building. As a result, there was a huge talent drain from the company.” – Packy McCormick
57/ Lead your team with authenticity and transparency. “Employees have a ridiculously high bullshit detector, more so than anyone externally, because they know you better. They know the internal brand better.” So you have to be honest with them. “Here’s what we’re going to tell you. Here’s what we won’t, and here’s why.” Set clear expectations and leave nothing to doubt. – Nairi Hourdajian
58/ When someone ask Jeff Bezos, when does an internal experiment get killed? He says, “When the last person with good judgment gives up.” – Bill Gurley citing Jeff Bezos
59/ “Getting too high on a ‘yes’ can prepare you for an even bigger fall at the next ‘no.’ Maintaining your composure in the high moments can be just as important as not getting too down in the low moments.” – Amber Illig
60/ “Most have an unlimited policy paired with a results-driven culture. This means it’s up to the employee to manage their time appropriately. For example, no one bats an eye when the top performing sales person takes a 3 week vacation. But if someone is not pulling their weight and vacationing all the time, the perception is that they’re not cut out for a startup.” – Amber Illig
61/ “Whenever we’re dealing with a problem and we call a meeting to talk about the problem, I always start with this structure. We are here to solve a problem. So the one option that we know we’re not going to leave the room doing is the status quo. That is off the table. So whenever we finish this meeting, I want to talk about what option we’re taking, but it’s not going to be what we’re currently doing.” – Tobi Lutke
62/ “[Peter Reinhardt] would put plants in different parts of the office in order for the equilibrium of oxygen and CO2 to be the same. He would put noise machines in the perfectly placed areas and then reallocate the types of teams that needed to be by certain types of noise so that the decibel levels were consistent. What I don’t think people realize about founders is that they are maniacal about the details. They are unbelievable about the things that they see.” – Joubin Mirzadegan
63/ “Leadership is disappointing people at a rate they can absorb.” – Claire Hughes Johnson
64/ Page 19 Thinking: If you were to crowdsource the writing of a book, someone has to start inking the 19th page. And it’s gotta be good, but you can’t make it great on the first try. So you have to ask someone else to make it better, and they have to ask another to make their edits even better. And so on. Until page 19 looks like a real page 19. “Once you understand that you live in a page 19 world, the pressure is on for you to put out work that can generously be criticized. Don’t ship junk, not allowed, but create the conditions for the thing you’re noodling on to become real. That doesn’t happen by you hoarding it until it’s perfect. It happens by you creating a process for it to get better.” – Seth Godin
Hiring
65/ Hiring when your valuation is insanely high is really hard. Their options could very much be valueless, since they would depend on the next valuation being even higher, which either means you grow faster than valuations fall (market falls in a bear market) or you extend your runway before you need to fundraise again.
66/ It’s easier to retain great talent in a recession, but much harder to retain them during an expansionary market. Talent in a boom market have too many options. There’s more demand than there is supply of talent in a boom market.
67/ If you’re a company with low employee churn, you can afford to wait a while longer to find someone who is 20% better in the role. – Luis von Ahn
68/ “[Fractional CMOs and CROs often] want to be strategists. Tell you where to focus, and what to do better. But the thing is, what you almost always just need is a great full-time leader to implement all the ideas.” – Jason Lemkin. The only time it works is when the fractional exec owns the KPI and the function, where they work at least 60% of the time OR they work part-time and help you hire a full-time VP.
69/ Hire your first full-time comms person after you hit product-market fit, when you are no longer finding your first customers, but looking to grow your customer base. – Nairi Hourdajian
70/ “Ask [a high-performing hire] if there’s someone senior in her career that’s been a great manager, and if so, bring them on as an equity-compensated advisor to your company. If there’s someone in industry she really admires but doesn’t yet know, reach out to them on her behalf.” Give her an advisor equity budget, so they can bring on a mentor or someone they really respect in the industry. As a founder, create a safe space for both of them. Monthly 1:1s and as-needed tactical advice, introductions, and so on. And don’t ask that mentor to give performance feedback “because if so it’s less likely they’ll have honest, open conversations.” – Hunter Walk
71/ Hire talent over experience for marketing and product. “In marketing and product I prefer people with less experience and a lot of talent so we can teach them how we do things. They don’t have to unlearn anything about how they already work. We teach them how we work. For developers it might be different because it takes a lot of time to be a really good developer, and it’s relatively easy moving from one environment to another.” – Avishai Abrahami
72/ If you’re going to use an executive search firm to hire an exec, ask the firm three questions: “1/ Walk me through your hardest search? 2/ Walk me through a failed search? 3/ Why did it fail? 4/ How do you assess whether an exec is a good fit?” You should be interviewing the firm as much as the candidate. Watch out for “a firm with a history of candidates leaving in a short timeframe. Avoid firms that recycle the same execs.” – Yin Wu
73/ Before signing with any recruiting agency, ask “What happens if the person hired is a bad fit? (Many firms will restart the search to align incentives.) Is there a time limit for the search? (Some firms cap the search at 6 months. We’ve worked with firms without caps.)” – Yin Wu
Governance
74/ “The higher the frequency and quality of a young startup’s investor update, the more likely they are to succeed in the long run.” – Niko Bonatsos
75/ Five metrics you should include in your monthly investor updates:
Monthly revenue and burn, in a chart, for the whole year
Cash in the bank, at a specific date, and runway based on that
Quarterly performance for the past 8 quarters, in a chart
Target for the quarter AND year and how you are trending toward it
76/ Another reason to send great, consistent investor updates is that when prospective investors backchannel, you want to set your earlier investors up for success on how they pitch you.
77/ If you don’t have a board yet, still have an “investor meeting.” “Create investor meetings where you invite all your investors to do an in-person + Google Hangout’ed review every 60 days. They don’t have to come. But they can.” – Jason Lemkin
78/ “[The] most important measures of success for a CEO [are] internal satisfaction, investor relations and consumer support.” – Bob Iger
79/ “Entrepreneurs have control when things work; VCs have control when they don’t.” – Fred Wilson
80/ If an investor really wants their money back (usually when VCs have buyer’s remorse), there are times when they force you to sell or shut down your companies. Instead, ask them, “What would it take to get you off my cap table?” – Chris Neumann
Product
81/ “The ones that focus, statistically, win at a much higher rate than the ones that try to do two or three things at once.” – Bruce Dunlevie, cited in eBoys
82/ Once you launch, you’re going to be measured against how quickly you can ramp up to $1M ARR. One year is good. Nine months is great.
83/ The more layers of friction in the onboarding process (i.e. SSN, email address, phone number, survey questions), the better you know your user, but the higher the dropoff rate. For PayPal, for every step a user had to take to sign up, there was a dropoff rate of 30%. – Max Levchin in Founders at Work
84/ “Product-market fit can be thought of as progressively eliminating all Herbies until there are no more Herbies. Then, you’re in a mode where you can invest in growth because it’s frictionless.” – Mike Maples Jr. (In the book, The Goal, the trek is often delayed by a large kid called Herbie. As you can imagine, the group only moves as quickly as their weakest link.)
85/ “There’s a ruthlessness in the way Dylan finds sources, uses them and moves on.” – No Direction Home. Be ruthless about how knowledgeable you can be about your customers, about your problem space, and about your product. The knowledge compounds.
Competition
86/ “If you patent [software], you make it public. Even if you don’t know someone’s infringing, they will still be getting the benefit. Instead, we just chose to keep it a trade secret and not show it to anyone.” – Max Levchin in Founders at Work
87/ If you know you’re building in a hot space, and your competitors are being bought by private equity firms, share that with your (prospective) investors. The competitors’ innovation slows, and optimizing for profit and the balance sheet becomes a priority when PE firms come in. – David Sacks
88/ “As a startup, you always want to compete against someone who has ‘managed dissatisfaction at the heart of their business model.” – Marc Randolph
89/ “You cannot overtake 15 cars in sunny weather… but you can when it’s raining.” – Ayrton Senna. It’s easier to overtake your competitors in tough markets than great markets.
90/ “Having a real, large competitor is better than having none at all!” – Anna Khan
Brand/Marketing/GTM
91/ If you’re a consumer product, your goal should be to become next year’s hottest Halloween costume. Your goal shouldn’t be fit into a social trend, but to define one.
92/ Don’t be married to the name of your company. 40% of NFX‘s early stage investments change their names after they invest in the seed.
93/ The viral factor doesn’t take into account the time factor of virality. In other words, how long it takes for users to bring on non-users. Might be better instead to use an exponential formula. “Think of a basic exponential equation: X to the Y power. X is the branching factor, in each cycle how many new people do you spread to. Y is the number of cycles you can execute in a given time period. The path to success is typically the combination of a high branching factor combined with a fast cycle time.” – Adam Nash
94/ In a down market, you may not need as big of a marketing budget as you thought. Your competitors are likely not spending as much, if at all, to win the same keywords as before.
Legal
95/ “Nothing is more expensive than a cheap lawyer.” – Nolan Church
The hard questions
96/ “I’d love to kill it and I’d hate to kill it. You know that emotion is exactly the emotion you feel when it’s time to shut it down.” – Andy Rachleff, cited in eBoys
97/ “Inexperienced founders are usually too slow to fire bad people. Here’s a trick that may help. Have all the cofounders separately think of someone who should probably be fired, then compare notes. If they all thought of the same person…” – Paul Graham
98/ When you’re in crisis, find your OAR. Overcorrect, action, retreat. Overcorrect, do more than you think you need to. For instance, lay off more than you think you need to. Actions can’t only be with words. Words are cheap after all. And retreat, know when it’s time to take a step back. “Sometimes you just have to do your time in the barrel. When you’re in the barrel, you stay in the barrel. And then you slowly come out of it.” – Nairi Hourdajian
99/ “A half measure is usually something a management team lands on because it’s easy. If a decision is easy, it’s probably a half measure. If it’s hard, if it’s really damn hard… if it’s controversial, you’re probably doing enough of it. The other thing is a half measure often doesn’t have an end result or goal in mind. If you have a really specific goal, and implementing that goal is difficult, that’s probably doing your job. That’s probably what’s necessary.” – Tom Loverro
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Before we dive into this blogpost, I’ve been asked by my legal friends to include the below disclaimer. I have a version of this at the bottom of every blogpost, but nevertheless, it doesn’t hurt to reiterate it again.
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
One of my favorite scenes as a kid was in Harry Potter and the Sorcerer’s Stone when Harry visits Diagon Alley for the first time. As the stone wall parted like the Red Sea, we saw a world unlike any we’ve seen before. With that, the audience along with Harry (Kudos for Director Chris Columbus‘ artistic direction) watched in wonder, excitement, and mystery. And Harry and I alike (Admittedly, I didn’t start reading the books till after the first movie) was hit with an overwhelming load of new information to absorb.
Raising your first fund is very much like that. While there are still some elements of familiarity, like investing in great people and winning great deals, you are taking other people’s money (OPM) for the first time. As such, it begs the questions: Who do you take money from? And how do you manage those relationships?
And like the stone wall in Diagon Alley, there’s more than meets the eye.
I have to thank Shiva for first bringing this topic to my attention, one that deserves a more nuanced breakdown than what is currently out there. And when Rebekah brought the below notion up for the Emerging LP Playbook, I knew I had to dedicate a blogpost to just this topic.
“GPs often have some flexibility on their minimum check size. I’m a pretty small check (particularly since I’ve been living on a founder salary!), but I can bring other things to the table to help the GPs I invest in (e.g. I highlighted Janine Sickmeyer from Overlooked Ventures in my Forbes column, I’m an advisor to Zecca Lehn from Responsibly Ventures, I send them deal flow from my AuthenTech community of founders). I’ve had luck with reaching out and saying ‘I really believe in what you’re doing. Please let me know if you get enough large checks and have room for some smaller LP investments.’ They’ll usually need to get enough big investments first since there are SEC limits on how many LPs they can have, and then they can let in some smaller, value-add LPs.”
The LP landscape is rapidly changing. What we knew in the last decade won’t get us to the next. The opacity in the LP world is getting undone by new, emerging LPs hungry to get involved and to learn. Folks, like Nichole at Wischoff Ventures have also shared publicly what her LP base looks like, with a level of transparency that’s foreign, yet refreshing for this industry.
Regulation has moved the needle, allowing for greater allocations to equity crowdfunding, as well as introducing more retail and high net-worth individual investors, to join the foray. Platforms, like AngelList, Republic, Twitter, Allocate, and Revere, just to name a few, are creating engines for better GP discoverability. There have been conversations on raising the ceiling on the number of accredited investors in a fund to 600. Which, if passed, will allow for smaller checks into funds, whereas the previous decades only allowed for family offices and institutions, as well as close friends. Anecdotally, I’ve also seen a lot of angel investors starting to allocate to funds rather than just purely startups.
And at this inflection point, as a GP, you need to be ready for this market shift that’s still early now, but starting to move. And hopefully, the below insights from 11 amazing GPs will serve as your wand, potions, owl and broom as you embark into the magical world of being a fund manager.
My methodology
To be fair, LP construction is more of an art than a science. So, I asked GPs who were on Funds I, II, or III. Why? Emerging GPs would best be able to relate a lot more to the hustle of finding and persuading different kinds of LP personas than someone who was on a Fund X or XV, who already have a long track record that speaks for itself.
I’m also a firm believer in tactical mentorship — mentors who are just 2-3 years ahead of you. People who have just been through the trenches you’re in and can share the lessons they learned. At the same time, not too far ahead where they are no longer the best people to check your blind side. After all, the lessons they picked up are still fresh in their mind. As a function, every one of these amazing GPs started their current fund in the past decade. The only caveat is that this may be the first recession they’re investing other people’s money (OPM) into, although they may have invested their own in the previous decade. And while that may be true, their lessons are timeless.
In the world of baseball, there’s the idea of breaking the catcher’s mitt. In other words, a new glove must be worn and used several times before it can achieve its full potential. Pitching to LPs and LP construction as a whole is no different. Just like a founder needs to pitch to several friends, colleagues, and investors, before they can hit their full stride during fundraising, raising from LPs requires many conversations and many iterations. Even Felicis’ brilliant Aydin Senkut got his first yes from an LP in Felicis after 107 iterations of his pitch.
So, in embarking on this topic and to get the best insight I could, it came down to two core pillars: the people I asked and the questions. I’ll start with the people.
Don’t get me wrong, there are a lot. And the folks included here are by no means all-inclusive. Many who had gone on to raise a Fund IV or higher. In effect, a few years or more out of the emerging manager game. Quite a few I didn’t know well enough. That’s on me. And some who, for all their goodwill and insight, unfortunately, were busy in the weeks prior to this blogpost coming out.
The questions
Building a firm with multiple funds is, in many ways, like driving a car through fog. Not my best analogy, but gets the point across. You see the rough outlines of the road just a few meters ahead, but you won’t see the sinkholes and the cracked concrete until you’re right in front of it, nor do you see any part of the road further than a few meters away. Or as Warren Buffett says, “The rearview mirror is always clearer than the windshield.”
Things are often painfully obvious in hindsight, but are scary, mysterious and unknown in foresight. Sometimes, you just don’t know what you don’t know. And as such, I write and I ask, in hopes to help the ones starting off, to develop foresight from the below cast’s hindsight. And to each, I had five overarching questions, coupled with follow-ups for more depth:
As you embark on your fundraise, note that different LPs resonate with different pitches. Additionally, when you choose out to reach out to each persona, be aware of what each of these LP personas’ incentives are. As a seasoned LP once told me:
High net-worth individuals seek to learn and rarely have a financial incentive.
Small and medium-sized family offices seek to learn and access top decile deal flow.
Larger LPs, like institutions and fund-of-funds, seek financial return.
From my conversations, it seems most GPs raising a Fund I start with individuals, then target larger check sizes as their fundraise matures. For Fund IIs, many seem to start with finding an anchor LP first, before reaching out to individuals and family offices.
The truth is there’s no silver bullet. And you’ll see exactly why below. So what might be more useful to you, an emerging GP, are anecdotes of what worked for different funds. As I call it, tools for your toolkit.
I will note that the one LP persona I won’t touch on as much since I have a lack of data here are corporates who usually seek technology, as well as information access, largely for acquisition opportunities.
Individuals
Start with people close to you.
“You should always target friendlies first. Welcome your references and first believers who might be founders, individuals, former coworkers, classmates.”
— Sarah Smith, Sarah Smith Fund
“It all depends on which Fund you are raising, how much you are raising, track record, team, and many more variables. If you are an emerging manager that is not spinning out of a brand named fund with a significant track record, you are going to have to be scrappy and start with people who know and trust you. “
— Steven Rosenblatt, Oceans Ventures
“You should always start off with your network – from the closest circle and outwards through the various concentric circles. At the beginning, you want to focus on finding your first believers. Those are your first-degree and maybe second-degree connections. So it’s less of the archetype of LP, but more so the depth of relevant relationship that matters. After the first close, that’s when you explore emerging manager programs or talk to more traditional asset managers — still largely within your first- and second-degree networks and/or those of your close early LPs and advisors.”
— Arjun Dev Arora, Format One
“The first $5 million is the hardest. Go to your friends and family. Build some momentum. After you get the initial momentum, it builds off of that. Everyone back channels everyone.”
— Vijen Patel, The 81 Collection
“For the beginning of a fundraise, I’d recommend asking for advice (before money) from people you’ve worked with for an extended amount of time. Your earliest checks may often be smaller but meaningful amounts from colleagues, co-investors, and GPs at other firms.”
— Paige Finn Doherty, Behind Genius Ventures
“The thing is my fund wasn’t oversubscribed from the beginning since I found it hard to raise. It’s a game of momentum, and in the beginning, I didn’t have any. In the beginning, it was about reaching out to the folks that you know. So, I mostly reached out to GPs and fund managers I knew and getting them through.”
— Shiva Singh Sangwan, 1947 Rise
“At the beginning, always start with people you have relationships with — people who’ve known you for a very long time. They not only want to invest in the fund, but invest in you. My first LPs would have likely invested in anything I created, but they knew I wanted to build a track record in venture. I’ve known one of my LPs since we were kids. Another was one of my best friends in university. Another was a friend of his.”
— “Mr. Huxley”, GP with two funds
Beware of relying too much on publicly available data to find LPs.
“The challenge with a purely data-driven approach (i.e. on LinkedIn or Pitchbook) is that you don’t understand the full rationale for why certain LPs invested in a fund. On paper, it may look like a family office is an LP in venture funds, but the principal at that family office could just be the brother- or sister-in-law of the GP. Most LPs also don’t explicitly say they’re LPs on LinkedIn. They could be an asset manager or a CEO of a Fortune 500 company. They almost always don’t want to be inundated with asks. Only after understanding why the industry is opaque, can you then understand LPs and find them.”
— Arjun Dev Arora, Format One
For potential MVP LPs, check size doesn’t matter.
“At the beginning of the fundraise, anyone that knows you and trusts you already AND can easily part with some money. Our first close was $20 million, and it was almost all people who knew us already – either directly or through our brand. We only had one new investor. In that group, we were lucky to have some fairly common names, which helped build the momentum for the rest of the fundraise.
“We did think about check sizes a little bit. There were some people we wanted to have involved for sure, and for them, the check size didn’t really matter. In our first close, we thought of people who could write a $250K check. And if there was someone we really wanted, we’d reduce it to $100K. I’m also an LP, and I do the same. If I plan to invest, I always negotiate down as well. The GP tells me X and I say I’ll invest X, divided by three.”
— Sheel Mohnot, Better Tomorrow Ventures
Persistence also speaks for itself.
“There are two types of investors: those who will commit to your fund now, and those who will invest after building trust. A lot of investors don’t like to invest in a Fund I. To keep them engaged, you either take a tiny check they’re comfortable with or you share regular LP updates that showcase your proof of work.
“In addition, you have to be clear with expectations. I bucketed potential LPs into four buckets:
High net-worth individuals
Founders and operators
Family offices
And GPs
“With each meeting, my pitch evolved and did a lot of follow ups. I had to show I was getting access to good deals and how I was getting access to those deals. You have to share the story behind that. That’s how you attract other investors. For instance, I remember sending my proof of work and an additional ten follow-ups to an LP. And each time I followed up, there has to be some new substance, value, and proof of work. It was a long process, but he ended up becoming one of my largest checks.
“Investors who were or are hustlers tended to gravitate towards my pitch. They became high-functioning people because of their hustle and respect me for my follow-ups and my persistence. They saw themselves in me. Similarly, founders are most likely going to get a reply from me who follow-up at least 2-3 times.
“The lesson here is that being persistent shows that you care. 99.9% of people won’t follow up, and by doing so, you’re already standing out.”
— Shiva Singh Sangwan, 1947 Rise
There are different ways to get in front of LPs: events, Twitter, deal flow, etc.
“Throw events for your LPs — a nice dinner or a cool experience — and ask them to invite their friends. Host events in a thoughtful way.
“Share relevant SPVs. Even broader, it’s content. Having founders be big fans of yours is also helpful. It’s a positive signal and creates buzz.
“That said, having co-investors who like you is a more direct path. LPs often ask VCs: Who are you co-investing with? Which emerging managers are you excited about? These LPs are looking for names. Some GPs are more generous with intros; while others prefer not to share but that’s OK as long as some do.”
— Arjun Dev Arora, Format One
“Looking back at my experience, a majority of our LPs from both Fund I and II actually came from Twitter and warm intros. I’m on Twitter a lot, mostly because I raised Fund I during the pandemic, so Twitter was where I hung out with many of my friends. I love to tell stories and as an extension I help founders tell their stories. And I host events and have done so since elementary school when I was on the student government event planning board. People are interested in my story because I don’t come from a traditional background. They invested mainly because they realize ‘she’s putting so much into the ecosystem, so it’ll eventually come back to pay dividends.'”
— Paige Finn Doherty, Behind Genius Ventures
Some individual LPs are not financially motivated.
“I want to preface that we only have foreign LPs, not US LPs. So, sophistication is very different. With European investors, while running a fund investing in the US, you can play the access game. In other words, you can sell access to great US companies. It’s something I lean on quite a bit.
“My LPs are quite sophisticated outside of the world of tech. They’re finance-savvy wealth managers, founders, high net worth individuals with net worths greater than $50 million, where they invest out of leisure and pursuing a mission, rather than for financial returns. They don’t understand venture, but want exposure to venture.”
— “Mr. Huxley”, GP with two funds
Start with HNW individuals, and end on family offices.
“Let’s make a few assumptions here. Let’s assume this is a Fund I and an emerging manager who doesn’t come from an extreme pedigree. Not from Sequoia or the like. This person is a decent operator-turned-VC, investing with a cool thesis. I’m going to also assume they’re not going to raise a $50 million Fund I or greater. They’re staying small and only raising $10-20 million.
“So I break down LPs into four categories.
High net-worth individuals – These are your angels.
Family offices – They have a lot more assets, usually $100 million or greater.
Fund of funds – They have a mandate to invest in other funds.
Endowments – These are very large institutions, maybe even sovereign wealth. They tend to write big checks into big funds.
“The big mistake I see many GPs make is that most GPs try to target the big ones out of the gate. Rather, in the beginning, focus on the high net-worth individuals. This is similar to asking angels. Their conviction and speed is quick. Their typical check size is no greater than $100K.
“Once you get a few million in the bank, then focus on the family offices — the $1-5 million checks. They tend to operate a lot like angels, but have just accumulated a lot more wealth. Around Fund II or III, then you target larger institutions.
“So, my recommendation is that as an emerging manager, start with angels, end with family offices.”
— Eric Bahn, Hustle Fund
“When you get closer to a final close, and you have a small fund, you can always welcome 1-2 family offices who can write small checks as well as individual investors who can be really helpful.”
— Shiva Singh Sangwan, 1947 Rise
Family offices
Find LPs by optimizing your search with certain keywords.
“Ask your existing LPs if they know anyone. Search LinkedIn to make their life easier. To find LPs, I would recommend looking up the keywords: Venture capital, asset manager, family office, emerging manager, startup (or venture) ecosystem, allocation, active allocator. All the above implies someone is putting money to work.”
— Arjun Dev Arora, Format One
Ask each person for just one intro, nothing more.
“Hustle Fund today has hundreds of LPs in our pipeline. But when we started off, we didn’t know a single family office. So, at the risk of sounding unintentionally mean, here’s how I think about it. Finding a family office is kind of like finding a cockroach. It’s always hard to find the first one. But once you find one, you’ll find a whole nest.
“I’ll share a tactical networking tip of how we found family offices over time. So, let’s say we chat with David. He likes us and decides to invest in the fund. We then share our fundraising blurb and deck and ask, ‘Do you mind sending this to one person you think would be a good fit for our fund?’
“The mistake I see a lot of other fund managers make is they ask, ‘Do you mind sharing this to anyone you think would be a good fit?’ Don’t ask for too much. There’s just too much paradoxical choice. There’s too many in their network to choose from and that overwhelms them.
“So, we change the question to just ask for one. That’s it. Generally, they think of the richest person they know. With just one intro, you’re magically in the family office world. A rich person tends to be friends with a lot of other rich people. It is secretive, but they also talk amongst each other a lot. When they invest, they like to bring their own friends in too.”
— Eric Bahn, Hustle Fund
Ask for intros to LPs who backed GPs who look like you.
“Another big filter is to find LPs who have backed GPs that look like you or have a similar investment strategy. For me, it was finding LPs who have backed solo GPs. To be fair, it’s not easy to figure out, since it is a rather opaque industry. So, I had other solo GPs I knew well and have co-invested with help make intros to their LPs.
“For LPs that I’ve never talked to before, a question I always ask LPs is: ‘Have you ever backed a solo GP?’ If not, don’t waste your time as you’re extremely unlikely to be their first. They likely have strong philosophical reasons to not back solo GPs so your meeting time is better spent elsewhere.”
— Sarah Smith, Sarah Smith Fund
Institutional LPs
Don’t underestimate the power of an anchor LP.
“If possible, having a respected entity who could anchor 5-10% of the fund would be ideal. In my case, my former partnership Bain Capital Ventures anchored my fund which was ideal because it keeps us connected and they are well known in the industry. Just like for a founder, having a lead is important. Having an anchor early helps you build momentum to close the rest of the fund.”
— Sarah Smith, Sarah Smith Fund
“For Fund II, I wanted an anchor LP to provide stability and credibility in the fundraise. Cendana was my number one pick. As a function of fund size at the seed stage, they’re definitely the best. The Harvard of LPs. To become part of their community, for me, was really important.
“It was a hard process, but was doubly as difficult, since Josh and I went our separate ways for Fund II. We had to communicate that decision to our 120 LPs in Fund I before starting the fundraise.
“In Fund I, some LPs believed in me. Some believed in Josh separately. I remember fondly of our first $10K check of belief capital. BGV’s most expensive decisions were our investment decisions. We made all our decisions together in Fund I. We also tried doing a few SPVs via Assure. While it was a great start to our career in VC, it required more work than we thought made sense. But for Fund II, it was going to be different. It was just me. No more SPVs, just checks out of the fund. The story itself wasn’t hard to communicate, but when we got to our 70th call, it was hard to sell the same emotional story.
“So, once we did, I put in the work. I flew to Australia to get introductions and to meet his teammate. Whenever I chatted with other GPs that were backed by Michael [Kim], I’d ask them to say hi to him.
“Pitching to Cendana, and most importantly, Michael, was the longest sales process I’ve ever gone through. He passed on Fund I, but he finally said yes to BGV’s Fund II. Along with Michael, GREE also doubled down on Fund II, along with operator checks from folks at Dropbox and other companies.”
— Paige Finn Doherty, Behind Genius Ventures
Bigger LPs have the ability to write smaller get-to-know-you checks.
“At the end of Fund I, we ended up with Cendana, Greenspring, Industry, Vintage, and Invesco. All fund-of-funds, but they all wrote relatively smaller checks than they typically do. For all the afore-mentioned funds, they wrote $1-3 million checks. It was a get-to-know-you check. They would talk to other companies in our portfolio and other managers we co-invested with. And so the best way to get in front of them was to get intros from other managers these fund-of-funds invested in.”
— Sheel Mohnot, Better Tomorrow Ventures
Talk to LPs whose minimum check size is 20% or less of your fund.
“Some CIOs like being in Fund I’s; others don’t. There’s a lot of alpha in Fund I. At the same time, there are others that won’t consider you seriously until Fund III. The challenge is figuring that out as quickly as possible.
“The best filter for this is figuring out what their minimum check size is. And, is that greater than 20% of your fund size? If so, it won’t be a good fit.”
— Sarah Smith, Sarah Smith Fund
“Biggest thing is their own AUM and the amount they need to deploy. First barrier to entry is the size of the fund you are raising as the GP. If you are raising sub-$75M (give or take) it wouldn’t be big enough for their minimum check size. LPs don’t want to be even close to a majority of your fund, or likely more than 20%.”
— Nichole Wischoff, Wischoff Ventures
“Some institutional LPs also cannot write small checks since they are dealing with other variables around their asset allocation models.”
— Steven Rosenblatt, Oceans Ventures
Start conversations early with LPs who can invest in the ideal fund size you want to raise.
“It’s not just about what your fund size is today, but where you aspire to be. Say you have a $25 million fund today, but aspire to have a $150 million fund where you lead Series As by Fund III or IV, then you should still talk to LPs who are able to write checks that are 20% or less of that future fund. It’s important to know there may be incredible university endowments or foundations who really like you as a GP but in order to run their business efficiently, they have to be able to write minimum checks of $25M or even $50M+ which means they only seriously consider funds of $150M+.
“The question for you, the fund manager, is: Are you going to grow your fund size over time? Or are you going to stay consistent with your current fund size? If the former, then you need to spend a fair bit of time in your deck about how your strategy will shift over time and some views into those larger future funds.”
— Sarah Smith, Sarah Smith Fund
“I started having conversations with institutions while I was raising Fund II knowing they wouldn’t come in until Fund III at the earliest. You need a lot of touchpoints and time with these types of LPs before they invest. I am very focused on LPs that want to underwrite me/the fund for years. I want long lasting relationships and partners that can come in fund over fund.”
— Nichole Wischoff, Wischoff Ventures
“So, when I speak to institutions that are more data-driven — they think about the scalability of AUM — I knew many of those folks were not going to be the best fit. That’s why raising Fund I was so hard.”
— Paige Finn Doherty, Behind Genius Ventures
“We have been cultivating relationships with a large amount of institutional LP’s over the last few years. Investors invest based on trust and relationship and in our mind that doesn’t happen overnight.”
— Steven Rosenblatt, Oceans Ventures
LPs hate surprises.
“There are some institutional LPs who will give you transparent feedback and transparency about their process but most do not. The #1 thing that rules them all is track record and performance. Institutional LPs don’t want surprises; they want to see a multi-year established track record in what you are investing in.”
— Steven Rosenblatt, Oceans Ventures
And even if they disagree with you, LPs like consistent LP updates, even prior to their investment.
“We have a couple institutions that have invested in Hustle Fund. What I didn’t appreciate out of the gate is how long it took to build those relationships. They want to see at least one fund cycle, ideally two. That’s usually anywhere between two and four years. But we’ve nailed how we do it passively.
“We have a newsletter that goes out on the first day of each month at midnight — every month for the past 5.5 years. Each issue has two things: a state of the market and a deal memo on each deal we’ve invested in.
“Today we have 150 investors across three funds and an additional 450 investors who have not invested yet. Think of it like a monthly drip campaign for these prospective investors. Investors get to see what we execute against what we say we’re going to do.
“In some cases, these investors like what they see and choose to eventually invest. In other cases, they find themselves totally disagreeing with how we run our process so they don’t invest, and that’s okay, too. Drip campaigns are always a great marketing tool to close customers. That’s no less true for Hustle Fund. So, at some point, when we mention we’re going to raise a Fund IV, all the meetings will just line up.
“I’ll share a story. Our biggest LP, Foundry Group — Jaclyn and Lindel run their LP initiatives — initially didn’t like our thesis and approach. To them, our investment model was a little too spray and pray. But at the end of our Fund II, they told me, ‘Even if we’re a little uncomfortable with your thesis, you’ve been so consistent with sharing how you’re learning and developing, and we love it. So, we want to invest now.’ They invested because of our newsletter, and witnessing our exact fund thesis. You gotta put in the work. And if you do, the money will follow.”
— Eric Bahn, Hustle Fund
Give LPs a compelling reason not to back an established fund. Otherwise, they will.
“Every institution is different, but it’s also really important to realize that with most institutions, the decision maker is not making the decision based on their own capital. So, risk is a huge point. No one is going to get fired for backing Sequoia. They could potentially get fired for putting a huge check into a new emerging manager that isn’t proving anything and going backwards. It’s important to understand the incentives of who you’ll be working with. So institutions are a completely different beast than individuals. Anything they do there’s usually 5 to 10 back references. It’s a small world. For pushback, they want to see a track record, which is really hard for emerging managers. And they want to see some sort of pedigree.”
— Vijen Patel, The 81 Collection
“I’m the horrible anomaly of being able to raise from institutional LPs in my first fund. I’ll chalk up timing, privilege, and reputation as being the reason we were successful in doing so. While not all of this is relevant to emerging managers today, 100 Days of Fundraising was a blog post which detailed how Homebrew ran its process.”
— Hunter Walk, Homebrew
Author’s Note: Of particular note, in Hunter’s alluded blogpost, is when he writes:
“What we also had was a point of view as to where we’d be investing: the Bottom Up Economy. This set us apart from other funds with broader or non-descriptive investment principles. We also had given extensive thought to our portfolio construction strategy around playing lead roles in rounds, the number of deals we would do each year, how much capital we’d hold back for follow-on, etc. The combination of these two meant that a fund could see how we’d be differentiated in the marketplace and where we’d fit against their current exposure.”
Should your LPs be active?
The truth is, and you’ll read this below, most LPs are passive. But in a world where you take so many different types of risk as an emerging GP, it helps to have people you can lean on. So, it really comes down to two questions:
What can you ask of your LPs?
What is the upside and downside to having active LPs?
The bull case for active LPs
HNW individuals are just waiting for the ask.
“The LPs I love working with are the ones who are going to be actively involved. They share their expertise with the portfolio, answer our questions, and are willing to jump on random calls with me. A lot of our LPs are high net-worth individuals, and they’re just waiting for the ask. They’re waiting for the GPs who they invested in, to engage with them. Sometimes, all it takes is a 20-minute call to share deals or thoughts or questions.”
— Paige Finn Doherty, Behind Genius Ventures
Your LPs will make LP intros if you have a good story.
“I think you can do a good job of getting LPs to send intros. If you can build trust and tell a good story, your LPs will naturally tell others because it comes up at a cocktail party organically. A VC fund is more interesting than ‘Hey I invested in a new ETF.'”
— Vijen Patel, The 81 Collection
Incentivize your LPs with additional carry.
“With Fund II, my Fund I LPs opened the door to other LPs in their network. Additionally, I am quite generous with my 20% carry for running the fund. I share 5% of the carry pool with other founders and LPs who send me deals, help with diligence and introduce me to other LPs.”
— “Mr. Huxley”, GP with two funds
Leverage your LPs’ brand to win deals.
“In my case, I had smart and well-connected LPs, and I was able to win deals because of them by inviting them into deals I wanted to get into. Some of my LPs happened to be fund managers as well, and I have been able to learn a lot from them.”
— Shiva Singh Sangwan, 1947 Rise
Build communities alongside LPs.
“I do believe there is room for LPs to provide value on top of what we expect today – better ways to tap their networks on behalf of our portfolio companies for example. At Screendoor for example, a fund of funds that backs underrepresented emerging managers, we strive to create a community among these VCs to support each other, and also pair them with VCs (like me) who can be coaches along the way when they have questions about firm building.”
— Hunter Walk, Homebrew
If you’re doing something for the first time, ask institutional LPs how other managers they’ve backed have done so.
“Since their investment offices have decades of experience in the venture sector and exposure to top managers across all stages, we often turn to them to gut check our reality against their perspective of the market. And when we encounter a type of situation for the first time, understand how other managers have approached the solution.”
— Hunter Walk, Homebrew
Author’s Note: Paige’s anecdote on how she engages her LPAC below is a great +1 to this point.
Let your LPs choose the kind of LP they want to be.
“I have no preference here. Rather, I’m open to what my LPs want their experience to be like. I have LPs that want to be more passive, as well as operator LPs who want to learn more about investing, lend expertise during diligence, facilitate customer intros, and even help out portfolio companies with hiring.
“After my LPs wire their money, I send them an intake form where I ask the question: How would you describe yourself as an LP? I have a number of statements they can select to indicate whether they are a newer or more experienced LP, if they’d like to be more active with founders, how often they’d like to communicate with me, and if they are interested in co-investment opportunities and events. I have another question following that: If you want to be more active, what are ways you enjoy helping?”
— Sarah Smith, Sarah Smith Fund
“I leave it completely up to them, but they typically opt to be more active. I host monthly one-hour office hours, share quarterly updates and deal reviews. For office hours, while we mostly chat about interesting deals I’ve been seeing in the last 30 days, my LPs can ask me anything. I try to be as communicative as possible – valuations, deal memos, and diligence. Sometimes they ask me to set up an additional SPV if they’re interested in putting additional capital in. I have a separate Airtable for deals we’re diligencing at the moment which LPs have access to. If they’re interested in a deal, they can reach out and ask. If not, they don’t have to.”
— “Mr. Huxley”, GP with two funds
The bear case for active LPs
Having engaged LPs is a lot of work.
“Candidly, I don’t want LPs that want to be super engaged outside of maybe one or two. It’s enough work as it is with quarterly reporting, etc. I want LPs focused on returns. Cendana is the most active with me and in great ways because they have so many emerging managers. I can strategize on fund size, raise timing, first hires, etc.”
— Nichole Wischoff, Wischoff Ventures
Emerging LPs want to learn from you, but remember you’re an investor, not a professor.
“Emerging LPs want that education. For emerging LPs who write a $5 million check or greater, they might like for you to jump on a call every quarter to educate them and share your current portfolio and what else you are seeing out in the field.
“Also, be thoughtful about how you’re managing your time, so that you don’t turn into a full-time venture professor. You’re an investor, a GP. That’s what you’re getting paid to do.”
— Arjun Dev Arora, Format One
Then again, most LPs are just passive.
“Most LPs are pretty passive. Sometimes they are helpful by making intros to our portfolio companies. We also like getting a pulse on the market from them.”
— Sheel Mohnot, Better Tomorrow Ventures
“Mostly passive. Most of the time, when the deals are good, they require little involvement.”
— Shiva Singh Sangwan, 1947 Rise
GP-LP fit: Red flags and things to watch out for
Avoid LPs who ask for special terms.
“These are long-term marriages, really long term. If you are going to be partners for the next 10-20 years, you better like each other. We have a no-asshole rule. We want investors who believe in our approach and ethos. My mentors at some of the top VC funds of the last 20 years have also coached us to keep the terms clean and I think a lot of emerging managers feel pressure to give special terms and ownership of their management company or GP, and long term, that might be something you regret.”
— Steven Rosenblatt, Oceans Ventures
“While I haven’t said no yet, I have selectively not followed up. For example, after talking with other GPs, I’ve heard some LPs were tricky to manage – outside the norm. It’s okay to expect quarterly communications, but when people start pushing an agenda, that’s too much.
“Avoid LPs who ask you to give up economics as a GP or change your terms. LPs who want to negotiate lower management fees, a different carry structure, or they want to own 20% of the general partnership for the next three funds are best avoided if possible. They want to change the terms that everyone else has. I wouldn’t allow that. If other LPs find out (and they eventually do), it would cause my LPs to lose trust in me and rightfully be frustrated that they got worse terms.”
— Sarah Smith, Sarah Smith Fund
Do your LPs’ goals align with your fund goals?
“As we got into the process we realized there was, at the time (2013) some other attributes we needed to take into consideration. One for example was the LP’s definition of success.
“We wanted LPs who were investing in us solely because they thought we’d be good stewards of their capital and return above-benchmark results. If there was a second agenda that they made obvious we typically declined the opportunity to work together. Our mindset was that there’s so much risk in trying to build a new firm, let’s focus all of our energy on a single definition of success: cash on cash returns. That precluded taking capital from LPs who were emphasizing direct co-investment (some of our LPs have direct practices and we love to bring them in to portfolio company cap tables when there’s mutual interest but we didn’t want it to be an expectation) or strategic investors who had interests in our portfolio different than our own (e.g. corporates that wanted access to market information).”
— Hunter Walk, Homebrew
Do you have the bandwidth to teach?
“If someone wants to learn, that can take a lot of time. Time that, for you, might be better spent elsewhere. If you’d rather spend the time elsewhere, like with your portfolio or investing, be clear with expectations. And if they don’t budge, don’t take that money.”
— Arjun Dev Arora, Format One
Beware of round tripping.
“I actually couldn’t take any Indian capital due to regulations. There’s a thing called ’round tripping.’ If a fund in India invests in a fund that’s built in the US, then invests back into Indian startups, that’s round tripping. And unfortunately, not allowed.”
— Shiva Singh Sangwan, 1947 Rise
Check your CFIUS rules.
“Before you say yes to LPs, check the CFIUS rules. Under those guidelines, you may not be able to take money from certain countries and parties.”
— Arjun Dev Arora, Format One
Did you take the right capital from the right people?
“Even though we heard ‘no’ a lot during our first fundraise we also turned down some offers. We’d already done a good job of pre-screening out LPs who we didn’t think were values aligned with Homebrew (e.g. money came from sources/institutions we wouldn’t want to work on behalf of).”
— Hunter Walk, Homebrew
“If they’re asking for things that you’re not comfortable with, then you probably shouldn’t work with them. The key is that there should be zero second-guessing. You need to be in a relationship with partners you won’t regret, during bull and bear markets. Ask yourself, ‘Did I take the right capital from the right people? Sometimes, it’s about where that capital came from and if you feel good about that. If there’s any inkling of doubt, don’t take the money or it’ll come back to haunt you.”
— Steven Rosenblatt, Oceans Ventures
“You need to communicate your clear values as a fund and long-term platform. Any LPs not aligned on your mission and values would be people to say no to quickly.”
— Arjun Dev Arora, Format One
“So, I did say no. I turned down a million dollar check because I didn’t feel comfortable with him being in front of a founder. And we’re very geared on our community. Money’s nice, but it’s not everything.”
— Vijen Patel, The 81 Collection
“Another thing to be mindful of is if an LP has a history of making verbal commitments and then changing that number at closing. You want a reliable and trusted relationship. If you did a reference with another GP, and heard that an LP cut their commitment by 50% at the last minute, that capital’s just not worth the risk to me.”
— Sarah Smith, Sarah Smith Fund
Don’t tolerate disrespect.
“I said no to a few LPs in Fund II. This was largely because they were super disrespectful during the raise process. I had an LP fly in from the UK after already committing and was so insanely rude to me in front of his all-male team that I decided not to work with them. I also try to be very transparent for folks that might not be a great fit for the fund.”
— Nichole Wischoff, Wischoff Ventures
“Small things I look for include off-color jokes, like ‘Look at that hot chick,’ or asking stupid questions. Some LPs have said this to Elizabeth, ‘How do you balance being a mom and being a full-time investor?’ I dare people to ask me that question. I’m a dad and I’m still doing it, but no one does.”
— Eric Bahn, Hustle Fund
Author’s Note: Eric goes into much more detail on ten reasons why you shouldn’t take LP money here, which I highly recommend a read.
Are your LPs disengaged during the diligence process?
“There are people who are disengaged in the diligence process. Those are people who are usually a bad fit.”
— Paige Finn Doherty, Behind Genius Ventures
Look for complimentary experience and diversity of opinion and experiences.
“Like any cap table or LP base, what is important to us is to have partners who can grow with us for a long period of time and where we have diversity of thought, experience, and exceptions. It was really important to Oceans and our ethos to have amazing founders and tech execs as LPs early on who could be great to lean on for diligence and additional leverage to support our founders and entrepreneurial family offices. At the same time we have LPs who are extremely valuable on the finance side and who have a long history of investing in venture. Complimentary experience and diversity of capital is really important to us.”
— Steven Rosenblatt, Oceans Ventures
“I also want to put it out there that GPs should be intentional about their LPs. For me, I aim to have my LP base include at least 50% who identify as women or non-binary, 10% black or Latinx, and 10% LGBTQ. Be intentional and solicit a diverse group of people. People talk about the diversity of founders and venture investors, but not about LPs. I think a lot about wealth creation, and it starts from the very top. I think people should be thinking about that a lot more.”
— Sarah Smith, Sarah Smith Fund
Don’t discount vibe.
“For Fund I, we had a chance to close $30 million worth of LP capital, but we only chose to raise $11 million. That’s a lot of people we said no to.
“It comes down to say a single word: vibe. It’s kind of like a marriage. ‘You’re trusting me with your wealth for a decade, if not more. It’s not a relationship we take lightly.’ I also share all the reasons why it won’t work out. So our LPs know what they’re getting themselves into.
“If something feels off, I don’t have to explain it. No one on our team has to explain it. If your gut feels like this could be off, we should just always trust that. Those one or two LPs your gut tells you is off are likely going to be super annoying,
“People like to logos their way out of things, but you really have to go back to gut feel. It’s almost never worth it. I can’t explain what an asshole feels like. But when you meet one, you know it.”
— Eric Bahn, Hustle Fund
“If I have a gut feeling that something is weird, then I trust that.”
— Paige Finn Doherty, Behind Genius Ventures
Big checks prevent you from bringing in other LPs you want.
“We haven’t had to say no to that many LPs. In our case, we either told them, ‘It’s too late – we’re full now and don’t have room for you.’ Or we talked LPs down from how much they wanted to commit. We had an LP who initially committed $22 million. And we told them, ‘Hey, we want to add more investors to our fund, so we don’t want to have any investors who commit more than $15 million.’”
— Sheel Mohnot, Better Tomorrow Ventures
Sometimes, the check size is just too small.
“I’ve said no because people wanted to invest below the minimum. To which, I told them to wait until they could meet the minimum. I’m not in the business of putting people in financial distress. And if my minimum, which is modest by design, $100K, called over two years, puts people in a position where they are stressed out, they shouldn’t invest in me or perhaps venture as a whole.”
— Sarah Smith, Sarah Smith Fund
“As the fund grew, I would turn down certain individuals due to check size.”
— Paige Finn Doherty, Behind Genius Ventures
But check size can vary based on an LP’s value to you or the portfolio.
“I also only reached out to people I wanted to have on board. The minimum check size did vary from individual to individual, which I largely based it off of the value they could provide for the fund and my portfolio companies.”
— Shiva Singh Sangwan, 1947 Rise
Or don’t settle and aim high.
“I hate the word ‘oversubscribed.’ It’s something I was lucky to learn very early on. Early in my career I had a board member say to me that if you hit your goals every quarter, your goals aren’t high enough.”
— Steven Rosenblatt, Oceans Ventures
Author’s Note: As you might realize even more after the last three pieces of advice, there’s really no right answer.
How do GPs think about building an LPAC?
Your anchor and other major LPs will ask you to create one.
“On the LPAC, I think I can confidently say that no fund manager wants an LPAC and proactively creates one. It is usually the ask of an anchor LP as you scale fund size. For example, for my second fund, I was asked by an LP to create one, and I was told a good number of LPAC members is three. You want the anchor LP in the LPAC because they are your biggest investor, and the two others should be trusted partners who want to help you. It’s up to me who I ask assuming not many have asked to be a part of it.
“I’ve been told most managers will have a bi-annual quick check-in call just to talk about how things are going. TBD if I ever do this. On the other hand, a lot of managers try to wait until they have at least $100M in AUM to give into an LPAC. But I didn’t say no.”
— Nichole Wischoff, Wischoff Ventures
“I think it’s, in large part, who wants to be on it. A lot of your larger LPs, in exchange for 10% of your fund, want to be on your LPAC. There are some investors who committed 10% but don’t want to be on it. It’s not like a board. If people want to be on it, it’s okay.
“We have five on our LPAC, and it’s a good number. We give them an early look by sharing with them our plan and fund deck. So, they gave us early feedback, like on carry structure.”
— Sheel Mohnot, Better Tomorrow Ventures
If a smaller LP wants to be on the LPAC, push back by giving them options that fit what you’re looking for.
“There are no real rules about how you approach them. We typically like to have our largest investors in it, at least symbolically. They’re putting in the most risk, so they should have a say in the direction of the firm.
“If someone does ask for it, and if they aren’t a large enough check, we tell them, ‘We like to reserve this spot for our largest LPs because they have the largest exposure in our fund. We’re open to you being a member in our LPAC, if you increase your check size.” That way, you can leave the ball in their court. Either, they won’t push further or they’ll commit more capital to the fund.”
— Eric Bahn, Hustle Fund
Evaluate a potential LPAC member on five different dimensions.
“So I will preface that emerging funds — Funds I to III or IV — are different from established funds, which have a mostly institutional base. Those who tend to write large checks may also be more inclined to want a seat on the LPAC.
“We look at it from these different dimensions, which we categorize into:
Flexibility,
Complementary skills,
Ability to give honest feedback
Value, and
Capital
“So, flexibility is important because we’re not an institutional fund yet. The construction of the committee depends on the ebbs and flows of fundraising. Some investors don’t want to be on an LPAC — conflicting interests, not wanting to be actively involved, or just don’t want the time commitment. This’ll admittedly look very different for an institutional LPAC down the road for someone who has several hundred million in AUM. Institutional LPs will ask to have a seat on the LPAC, especially if they’re writing a check that accounts for 20% or more of the fund.”
— Steven Rosenblatt, Oceans Ventures
Go to them if you plan to go off-thesis.
“You go to them for things you might think are a conflict. For example, if I say I write $1M checks and I am considering going off-thesis and writing a $250K check, I might want to gut check and get a thumbs up that I’m not being an idiot. It would be a super simple email saying: ‘Hey team, here’s the scoop – please share thoughts.’ It’s very loose.”
— Nichole Wischoff, Wischoff Ventures
Ask your LPAC what they’re seeing in other managers they’ve backed.
“I didn’t expect to negotiate my LPA with Cendana. I have Michael [Kim] and Yougrok [from GREE Capital] on my LPAC. Youngrok is someone I meet with very often. And since GREE backed us since Fund I, he’s seen my growth as a fund manager. Our LPAC offers a great and critical lens into the industry.
Individually, I chat with both quite often. Together, as an LPAC, we meet quarterly. We’re also going to have our first general annual meeting on April 21st.
What’s great about Michael and Youngrok is that I’m not afraid to ask questions I think are dumb. If you’re in your Fund I or II, like I am, you’re still figuring shit out. You’re still testing what works and resonates and what doesn’t. I ask them, ‘what have you seen other managers do in this situation?’ They’ve worked with so many other managers, and in learning from their deep knowledge, I’m better off as a manager. It’s about building BGV as a long-term institution.”
— Paige Finn Doherty, Behind Genius Ventures
Your LPAC is your LP base’s chief influencer.
“One useful note about having an LPAC is that sometimes you want to make a minor change to the LPA. Say you originally planned to only invest in North American companies, but now you want to invest 5% of the fund in African startups. If you don’t have an LPAC, you have to go back to all your LPs each time you change the parameters of the agreement. If you have an LPAC, they can approve those minor changes for you on behalf of the rest of the LPs.”
— Sarah Smith, Sarah Smith Fund
“To be honest, I’m still confused about the purpose and concept of an LPAC. I like to think of the LPAC as the influencer of the LP base. They keep the investors’ interests in mind and help you communicate hard decisions to your investors.”
— Eric Bahn, Hustle Fund
Consult your LPAC for tough decisions.
“It definitely matters more at the end of the fund life. For instance, if we want to wait an additional year for Stripe to IPO. Then we consult with our LPAC to figure out the best way to message that to our LPs. Additionally, we can ask them what they think about a deal we’re about to do. It can also be useful in corporal situations. Hypothetically, if Elizabeth was beating me up, I can ask our LPAC to help me remove her.”
— Eric Bahn, Hustle Fund
“Since we’ve got a very small group of LPs that make up 95%+ of our funds, there isn’t much difference between our relationship with our LPAC and the other LPs. That said, we do have an LPAC and it’s composed of the largest investors in our funds. We meet with them once a year – typically a lunch before our annual meeting. And share the materials/discussion with the rest of the institutional LPs as well, so it’s less about anything confidential and more about a group of stakeholders we can get feedback from. Of course there are sometimes administrative aspects (approve us raising our recycling limits for a fund) but more often than not Satya and I are seeking feedback on questions we’re facing about how we want to manage the firm, tradeoffs between short and long-term thinking, and such.”
— Hunter Walk, Homebrew
“For us, when we constructed our LPAC, the questions we asked ourselves were:
Who do we think would be valuable in helping us balance short term decisions with long term thinking?
Who do we think will give us honest feedback and engage in honest conversations?
And who do we know has complementary DNA?”
— Steven Rosenblatt, Oceans Ventures
Find LPAC members who come from diverse experiences.
“I use it as a mini-board. I won’t go to it for big decisions, but I like the idea of surrounding myself with people who have different experiences than me, who have dissent, and make me a better investor.”
— Vijen Patel, The 81 Collection
Build an LPAC of different LP personas.
“If you have a great LPAC, they’re almost like a board of directors. You have some kind of cadence to get advice. If I did have one, I would like to do it with a group that represents my LP base – a few family offices, individuals, and people who could give really good advice.
“For first-time funds, you don’t want it to be any more than three to four people. And four to six for more established funds.”
— Sarah Smith, Sarah Smith Fund
“My advice to other VCs in building their LPAC would be to remember it’s about institutions, not individuals – your LPs representative might change over the course of the years. And, if applicable, to make sure you have a mix of LP types – for example, if your fund LPs are a mix of evergreen investment offices (such as most endowments) and folks who think of returns on a different cycle (fund of funds), include both.”
— Hunter Walk, Homebrew
The tech stack of engaging LPs
While I didn’t ask everyone this question, thought I’d share what notes I did have on some firms’ tech stack for engaging their LPs and managing their investor relations.
Wischoff Ventures — Airtable, Figma
“A spreadsheet/Airtable — I have everyone’s emails and copy-paste when I’m ready to send a quarterly update. I only talk to most once per quarter and it’s for my update. I built that in Figma (wouldn’t recommend it).”
Oceans Ventures — Affinity
“We use Affinity to manage our LP CRM. Our existing LPs get quarterly reports. And we try to write an LP update at least two times a year but will also often put out memos especially during key market moments. Also, since day one, we have a newsletter that keeps people up to date. It goes out every two to three weeks. And we have a personality. We’ve had other VCs tell us how excited they are to read it and we have LPs tell us they love our newsletter. We try to over-communicate and keep them heavily engaged.”
The 81 Collection — Streak, Airtable, Hubspot, Excel/Google Sheets
“We use Airtable, Hubspot, Excel and Google spreadsheets, but Streak is our main thing.”
“We’re pretty software-heavy — something I picked up from my time at WorkOS. We use:
Cloze — as our CRM, where we track what cities folks are in in, who’s in the pipeline and more
Airtable — for portfolio management
Google Drive
Webflow — for our website
Zapier — but there’s only so much you can automate
1Password — we’re pretty big on security
Calendly — but we’ve gone back and forth on that. I’m trying to spend more time with people who’ve invested in our fund, as well as the founders we invested in.
Twitter
Descript — for podcast transcriptions
Riverside — to record podcast episodes”
1947 Rise — Email, AngelList
“Regular LP updates, as well as my newsletter, have been my biggest engagement tool with LPs. I send the former out once a quarter, and the latter every few weeks. Luckily, I can also see all my LPs on my AngelList dashboard.”
“We used Carta, Affinity, Mailchimp, Aumni for analytics, and Anduin to bring LPs in. Fundraising is a bunch of chasing people down. Anduin’s a workflow tool. You can send people stuff and have people sign them all in one tool. Actually, several LPs told us that Anduin was the smoothest onboarding experience they’d ever had.”
“Mr. Huxley’s” Firm — Airtable, Notion, Whatsapp, Quickbooks, Google Drive
In closing
As I was writing this blogpost, a big part of me wanted a nice, easy linear narrative around LP construction. But I knew there wasn’t. In the many conversations that led to the above writing, it became quite evident there was no undisputed best way — no cure-all — to build an LP base.
Some believed in aiming high and never becoming oversubscribed. Others generated demand for their subsequent fund or was able to be judicious with their LPs by being oversubscribed.
Some built momentum by securing an anchor LP. Others started from individuals they knew the best.
Some didn’t budge on minimum check size. Others were flexible.
The list goes on and on. While there is no right answer, in knowing all of the above possibilities and strategies, I, and everyone who helped me make this blogpost a reality, hope you are armed with the knowledge to make the most informed decision for your fund. And to that, cheers!
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
