Looking across successful limited partners, there are three key themes that continue to appear in the reasoning behind their investment behavior. The first is the track record of the general partners, both as past investors and as a team, the second is the relationship building and ability to guide their portfolio companies and the third is the ability to build the returns that match the amount of risk associated with VC investments.
Many successful limited partners look for GPs with a proven track record in investing. Michael Kim of Cendana Capital says that he often invests in first-‐time fund managers, “but all of them have been active investors” (Venture, 2017). Alan Feld of Vintage Investment Partners also states that investment experience is key when looking to partner with new GPs (Kelly, 2017). In their book Beyond the J Curve, Thomas Meyer and Pierre-‐Yves Mathonet rank management team skills as the most important criteria when looking for general partners stating that “investment and operational experience, [and] sector expertise” account for 30% of their scoring of venture GPs. Yatin Mundkur of Artiman states that as a company reaches a stage further along the growth track, he looks for more specialized investors who are well versed in a specific industry and has the right connection to ensure follow-‐on capital (Gupta, 2013).
Another repeating theme among LPs is the relationship GPs are able to foster with their entrepreneurs. Feld says they look for fund managers that are able to not only attract but also coach the entrepreneurs again referencing the importance of industry experience (Kelly, 2017). Limited partners are looking for general praters who have been in the trenches and can provide advisory and mentorship to those companies who are trying to scale. Beezer Clarkson of Sapphire Ventures looks to invest in GPs that can advise their portfolio companies “providing perspective drawn from years engaging with the tech industry” (Stebbings, 2018). Successful advisor to LPs, Alex Bangash, looks for manager “who become magnets for smart entrepreneurs” (The Business of VC, no date). Kim again echoes the same sentiment stating that he looks to see if the fund manager is someone who has been a key source of advice to the portfolio companies along their growth trajectory (Venture, 2017). The network between the LP and entrepreneurs is not the only important relationship. Research also consistently shows that LPs find new fund managers through their strong networks of other LPs and GPs.
The terms agreed on between the VCs and their portfolio companies are also important to limited partners. Kim states his focus when looking at fund managers is the construction of the portfolio focusing on “fund managers who lead their investments and get at least 10 percent ownership” (Venture, 2017). Should GPs need to make management changes or strategic decisions it is important that their investment backs up their ability to insight change within the portfolio company. With an increase in competition for funding sources, entrepreneurs in recent years are gaining more power at the negotiation table “adding pressure to VCs to cultivate ‘founder friendly’ reputations” and GPs must be able to find the right balance between control and advice (Winkler and Farrell, 2018).
Third, LPs are looking for a return on their capital. Managing director of Top Tier Capital Partners, Lisa Edgar, states her top criteria for finding GPs is looking for those that deliver “super returns” (The business of VC, no date). GPs are willing to back investors with a strong track record who have success in multiple funds. According to Zider, for venture capital, GPs are looking for a return between 25–35% (1998). Investors of PE LBO firms have similar expectations for returns of around 20-‐25%, but these deals differ in that they are heavily debt financed and often investors are focused on companies in a more mature phase of the business life cycle.
Sources: Gupta, U. (2013) ‘Newcomers to Venture Capital Investing’, Wall Street Journal, 20 September.
Available at: https://www.wsj.com/articles/newcomers-‐to-‐venture-‐capital-‐investing-‐ 1379689242 (Accessed: 6 July 2018). Kelly, D. (2017) ‘The money behind the money: Being an LP in venture’, Venture. Available at: https://medium.com/venture-‐conf/the-‐money-‐behind-‐the-‐money-‐being-‐an-‐lp-‐in-‐venture-‐ a4dea7db6617 (Accessed: 5 July 2018). R. Winkler and Farrell, M., (2018) “In ‘Founder Friendly’ Era, Star Tech Entrepreneurs Grab
Power, Huge Pay,” Wall Street Journal, Available at: https://www.wsj.com/articles/in-‐ founder-‐friendly-‐era-‐star-‐tech-‐entrepreneurs-‐grab-‐power-‐huge-‐pay-‐1527539114 (Accessed: 6 July). Rowley, J. D. (2018) ‘The Top Ten Family Offices With The Most Direct Startup Investments’
Crunchbase News. Available at: https://news.crunchbase.com/news/top-‐ten-‐family-‐offices-‐ direct-‐startup-‐investments/ (Accessed: 6 July 2018). Stebbings, H. (2016) ‘What investors want from venture capital firms’. TechCrunch. Available at: http://social.techcrunch.com/2016/06/13/what-‐investors-‐want-‐from-‐venture-‐capital-‐firms/ (Accessed: 6 July 2018). The Business of Venture Capital (no date) ‘How Limited Partners conduct fund diligence’
Available at: https://www.thebusinessofvc.com/blog/how-‐limited-‐partners-‐conduct-‐fund-‐ diligence (Accessed: 6 July 2018). Zider, B. (1998) How Venture Capital Works, Harvard Business Review. Available at:
https://hbr.org/1998/11/how-‐venture-‐capital-‐works (Accessed: 5 July 2018).