Repost: Raising A Fund? 9 Questions That Help Get You To GP/LP Fit

Follow me @samirkaji for my random, sometimes relevant thoughts on the world of early stage venture and start-ups.

Here are my top questions to ask an LP:

1. What are you currently investing in?

The majority of times I meet with GPs, they’re eager to start pitching — which is often why we’re meeting in the first place and is an exciting part of my job. But I usually like to ask if I can talk to you about Sapphire first to give an overview of who we are what our investment thesis is.

2. Why venture and how long have you been investing in it?

I like this question because it’s an open-ended way of learning about an LP’s interest, experience, and perspective on venture. Understanding more about an LP’s background in venture helps you filter choices for a good fit for your fund.

3. How much capital do you have under management, and how much of that is invested in venture?

As a GP, you want to size the breadbox and figure out how much money is actually available to invest in you. A university endowment might have a whopping $10 billion under management, but perhaps the majority of it is going into public markets or other forms of alternative assets (buyouts, hedge funds, etc.) with very little trickling into venture funds. Just because an LP has a lot of capital doesn’t mean they’ve allocated that capital specifically for venture.

4. How many venture managers are you currently allocating to? Will you be allocating to any new managers this year?

Many GPs pose the simple question: “Do you invest in venture?” An LP could truthfully answer yes, but still not be in a position to fund that GP. A more specific question to ask GPs looking to raise money now is: “Will you invest in any new venture fund managers this year?” LPs often choose to work with specific managers and specific funds and don’t always add new managers to their portfolios every year. (Note: this means net new manager to the portfolio, not necessarily a newly formed venture manager.)

5. What strategies and geographies are you actively investing in?

“Strategies” is LP-speak for the kinds of funds an LP is targeting. They might be early-stage or growth-stage funds. Or maybe the LP is focused on a specific sector like AI, or enterprise IT broadly. Strategies can also be geographic plays, targeting the Tri-State area or Europe. Sapphire’s Fund Investments business, for example, focuses on early-stage (meaning primarily Series A focused) funds in the United States, Europe, and Israel.

6. What is your preferred check size and fund size?

Let’s say you have a $200 million fund. You’ve been swapping emails with a certain LP before they say, “We write $50 million dollar checks, and don’t want to own more than 10 percent of the fund.”

7. What has been your history of supporting fund managers in follow-on funds? When you have not followed on in a fund, why not?

While it’s rare that an LP will provide any guarantees of investing in future funds, it is important for GP’s to understand whether the LP traditionally has supported managers across multiple fund raises (and through economic cycles). As a manager, an important element of durability is building stability with your LP base and knowing who may or may not be there for the next fund will greatly help with planning ahead.

8. Who is on the investment committee and what is your process for allocation approvals?

LPs are a diverse bunch — maybe your target LP is a family office and the decision-maker is a family member with a background in tech. Or, the LP might be an endowment with an investment committee comprised of alumni, a large pension fund that hires outside consultants to help select managers, or a fund-of-funds with a dedicated team for venture and the ability to make direct and indirect investments.

9. Outside of great returns, what are your expectations of GPs post investment?

Having a healthy relationship of any type requires great communication prior and during the relationship. Understanding what the LP expects in terms of communication cadence and style is critical in ensuring strong alignment.While it may not be practical to create a bespoke relationship plan for each individual LP, uncovering general themes will help create the right type of ongoing engagement (and increase the likelihood of future allocations). Conversely, if the LPs expectations of engagement post-investment are not in alignment with you, it’ll serve as sign to potentially pass.

It’s a people business

Even more so than GPs, LPs work in a people business. As Chris Douvos, an LP at VIA Funds points out, “GPs invest in business ideas that can be evaluated in the context of a more easily understood set of variables while [LPs] invest in people, a far more intricate asset.” That doesn’t mean that LPs have it harder, or vice versa. It simply means that LPs aren’t making direct bets on companies to succeed — they’re betting on the managers they choose.

VC/tech advisor, venture blogger, active angel investor, banker