There are LPs who see VC as an asset class. And there are those who see it as an access class. Most GPs spend time with the former. Most emerging GPs try to spend time with the latter, just ’cause the former are out of their reach for multiple reasons. Chief of which is probably that the “asset-class” LPs typically write large checks, have small teams, and have little to no appetite for the risk in this asset class. Also given how much the industry is a black box, it’s hard to underwrite anything that puts their career at risk.
But most emerging GPs I talk to actually fail the latter, the “access-class” LPs, more often than not. Much of which is in understanding how to approach them.
In the world of business, there are customers and there are buyers. Someone who makes a one-time purchase, and rarely again is a buyer. It could be due lack of demand. Lack of availability. Or simply, they were bamboozled. Fool me once, shame on you. Fool me twice, shame on me. Most emerging LPs, whether individuals or family offices or even corporate venture arms, buy a product once. And unfortunately, what they were sold and what they bought ended up being two different things.
Relationships, in any industry, take time to nurture. It takes time to win trust. Those who trust easily can take trust away easily. Yet, most GPs talk to LPs for the first time when they start fundraising. With a fire under them. And a sense of urgency as the clock is ticking. And by function of that, attempt to force these LPs who see VC as an access class to make a transactional decision.
To help visualize the difference, this is how I typically like to frame it:
LPs who see VC as an… | Asset class | Access class |
When pitching them, it’s similar to which business function | Marketing (Brand and outliers matter) | Sales |
Turnover rate in portfolio | Low | High |
Involvement | “Lean back” (Big picture) | “Lean in” (In the trenches) |
Strategy | Strategy not to lose (Play to stay rich) | Strategy to win (Play to get rich) |
Depth vs Breadth | Breadth > Depth | Depth > Breadth |
Capital flows in the near future | Steady state (VC exists and will keep our allocation at a steady state / set percentage annually. Any additional significant DPI generated here is re-allocated to other assets.) | Capital increase (VC is interesting and likely to increase allocation to it in the impending future.) |
For access-driven LPs, they typically transition to asset-driven after about 4 years. Subsequently churning from their “access” category, as they now have enough relationships and “experience” building a strategy around venture capital. Access-driven LPs typically churn through their portfolio quite frequently, with generational shifts and new regimes and interests.
Moreover, with access-driven LPs, the pitching process is often collaborative and there’s room for terms negotiation. More often than not, they have curiosities they’d like to satiate. Asset-driven LPs have you pitch them. When challenged, they are more defensive than they are curious.
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