Emerging VC Fund Managers: 6 Things LPs Don’t Want To See
By: Arjun Dev Arora
Tags: Entrepreneurship, Market, Capitalism, Startup, Venture Capital

“In VC investing, there is no “passive” approach, and

manager selection is the key to capturing attractive returns.”

— Cambridge Associates.

The need for high-performing, emerging VC fund managers will only grow with time. As large pools of wealth move from one generation to another, the new stewards will require the help of emerging fund managers to deploy their capital in a way that:

Reflects their unique value systems.

their unique value systems. Generates returns that are commensurate with their unique profiles.

returns that are commensurate with their unique profiles. Respects the core operating principles and beliefs of their ancestors (i.e., the older generation).

Furthermore, venture capital — as an asset class — has matured thanks to a more sophisticated approach to fund formation, governance, and network intelligence. What was once considered a high-risk unproven asset-class, is now a rigorous, risk-managed approach to funding innovation.

Therefore, talented emerging fund managers have a tremendous opportunity to position themselves to prosper from one of the most significant wealth transfers that will occur in human history. Especially if you are an emerging fund manager who is:

Intrinsically motivated to be the best steward of capital.

motivated to be the best steward of capital. Patient and possess a long-term view of their growth and development.

and possess a long-term view of their growth and development. Understands relationships and enjoys building trust with key stakeholders over time.

and enjoys building trust with key stakeholders over time. Values capital and the power it possesses to stimulate innovation and economic growth.

If you have read our previous post on Limited Partner (LP) outreach, you understand the realistic expectations to raise your first fund:

Outreach to over 500 LPs to secure your first fund.

From a cold start, it can take anywhere between 3–6 months to secure a meeting with a specific LP.

It takes between 12–18 months to raise (+/- depending on unforeseen economic shocks and events).

This is predicated on:

Activating your 1st-degree and 2nd-degree networks to get introductions to LPs. Communicating your value proposition to LPs so they will want to take a meeting and get to know you.

However, since most LPs will want to get to know you over time before committing capital, there are a few ‘watch-its’ when engaging with LPs. In the early days, your goal for LP meetings is to secure the next meeting to continue building the relationship. Therefore, you do not want unnecessarily and unintentionally trigger alarm bells, which will close the door on the relationship.

LPs, especially experienced ones, have a keen eye for negative indicators — just like an experienced civil engineer can look at a building structure and identify potential single points of failure.

In this post, we share six things LPs don’t want to see in emerging fund managers — we also share what they would prefer to see instead. LPs range in shapes and sizes too, and can include:

Founders and CEOs of existing companies.

Institutional investors, domestic and foreign.

Foundations and endowments.

If you are an emerging fund manager, most of your LPs are typically going to be family offices. For this post, we will focus specifically on LPs who have a long-term outlook on capital — increments of 10 years, for example — and manage 1B+ at a minimum. We focus on these LPs because once they do commit, they typically commit for three to four funds — making future fundraising easier over time (contingent on how well you perform as a fund manager).

The advantage: these LPs can continue to stay engaged with your fund over multiple economic cycles rather than respond skittishly to press and media over the short-term.

1: OVER-HYPED TRACK RECORD & ASSOCIATIONS

Hype, track-record, and associations are essential for quickly establishing credibility and relevance. Being transparent about successful investments is also important for demonstrating you have experience in the venture space, you spotted an opportunity, and you invested. However, over-hype is a negative indicator for multiple reasons:

A truly great track record doesn’t need to be overemphasized — just communicated transparently and professionally. Top LPs, while being emotional, are also strong rational thinkers who don’t enjoy playing ‘status’ games — they are about growing lasting, intergenerational wealth that reflects their unique value systems. Future success isn’t always a function of past success — past success teaches a lot. However, past success is typically a function of multiple variables, such as the people you collaborated with (team) and the specific market conditions during that period. Minimize your legal risk — inappropriate attribution to your fund thesis can be perceived as providing false/misleading statements. If in doubt, check your positioning with a VC lawyer.

Therefore, in demonstrating your track record and associations, be thoughtful:

Identify investments that are relevant to your thesis. The applicability of your track record is more important than big logos. For example, if you are investing in the Future of Work (FoW) and positioning a freight-tech investment as a point of credibility — the relevance isn’t obvious at all, even if your tech is about automating repetitive tasks and enabling human brokers to perform at new peaks. However, if you have led successful FoW investments and your fund strategy is to lead — great!

(Note: personal, sporadic, investing, and angel investing doesn’t count. It only counts if you have done that for some time, in some structured fashion, and have demonstrated performance consistently — one or two deals is not enough. Of course, we never say never, as there are always star performers such as Pejman Nozad who ‘“WOW”’ the ecosystem with sheer effort, patience, and collaboration.)

Communicate your structured decision-making process in investing and why you thought it would perform. Can you explain why you decided to invest in the past? Can you be transparent about the upside you saw and the risks? Can you tell why you accepted taking those risks? How did you compensate for bias in the investment decision-making process?

Can you explain why you decided to invest in the past? Can you be transparent about the upside you saw and the risks? Can you tell why you accepted taking those risks? How did you compensate for bias in the investment decision-making process? Strong emerging fund managers need some financial experience, whether running a P&L, being an investment banker, or, of course, working as a partner at a prior venture fund. If you don’t have financial experience, don’t lie about it. Maybe your founding partner does — demonstrate how you have compensated for individual voids and capitalized on talent synergies between team members.

Remember: you don’t want to come across as trying to ‘flex’ and artificially create ‘credibility.’ It is better to be transparent about your strengths and weaknesses, and, over time, demonstrate how you have grown.

2: HAPHAZARD PARTNERSHIPS WITH POOR SYNERGY

High-performing teams outperform individuals. However, this is predicated on several things (but not limited to):

Stability of the team, in particular, values-alignment and incentive-alignment.

Combined network reach, density, and diversity — not just a single network.

Talent chemistry and synergy (1+1 > 2).

Demonstrated experience working together.

Stitching together a team based on informal commitment just to appear more prominent on your marketing collateral — website, social media, pitch deck — is a negative signal. Furthermore, doing so without those individual’s formal consent can erode trust and critical relationships. People do this to demonstrate they have access to deal flow and to strengthen their’ status.’ Again, that can only get you so far. It is better to go back to first-principles:

Articulate what skills, experience, and resources your fund needs to succeed.

what skills, experience, and resources your fund needs to succeed. Identify what unique strengths and experience you need in the team.

what unique strengths and experience you need in the team. Define the value-systems that will bond the team together so different perspectives improve decision-making (decrease bias) rather than causing unnecessary conflict.

the value-systems that will bond the team together so different perspectives improve decision-making (decrease bias) rather than causing unnecessary conflict. Respect differences in belief but identify the core belief that every team member must-have. For example, I look for people who believe life is a chance to do your best work and express more of your potential. However, not at the cost of anyone or anything — they are positive-sum players.

If you don’t have the team out the gate — that’s fine. But you need to clarify a path to having support structures in place for everything from reporting, due diligence, accounting, legal, and marketing — are you leveraging advisory relationships such as Aduro? Are you leveraging technologies to help you?

If you and your co-founder (GP) haven’t worked together in the past, then you have to be very clear about your values and responsibilities, and why the cohesion exists — then let time and patience prove your hypothesis right (or wrong).

Summing it up: there are many accelerants for networking and team-building. However, solid relationships need time to be built. I’m an advocate for what Naval Ravikant refers to as ‘playing long-term games with long-term people.’

“In a long-term game, it’s positive sum. We’re all baking the pie together. We’re trying to make it as big as possible. And in a short term game, we’re cutting up the pie.”

— Naval Ravikant

3: IMBALANCED PRESENTATION BETWEEN BIG ‘VISION’ AND IMPORTANT DETAIL’

Top emerging fund managers have the gift of ‘drone-level’ vision and ‘on-the-ground’ visibility. That means they can provide high-level overviews, see trends, and devise a strategy that makes sense. However, they also can serialize that strategy into a set of actions, priorities, and processes:

What needs to be done.

needs to be done. Why it needs to be done.

it needs to be done. Who needs to do it.

needs to do it. When it needs to be done.

it needs to be done. How they need to go about doing it.

Generally speaking, information is considered more detailed if it is more sensory-specific (behaviorally specific). For example:

“We will hire a marketing leader with ten years of enterprise experience. To recruit the marketing lead, we will run LinkedIn job advertisements and ping our 1st-degree networks to source applicants. The applicants will be vetted via a 3-tier screening process, including — questionnaire, introductory interview, and an in-person interview at our offices.”

A more high-level description would be more ambiguous — you would find it hard to film a movie-script using the information. For example:

“We will hire top talent and have a reputable brand in the ecosystem.”

In summary: when positioning your fund proposition, do your best to communicate vision and strategy and always reinforce it with more detailed action plans and processes. An LP should be able to stop you at any point and feel confident that you can unpack more details or provide an overview.

4: CONFUSED LP VALUE-ADD

Don’t mix your distinct value propositions to founders and LPs. Emerging fund managers must communicate their differentiated thesis differently to founders and LPs because they have different criteria for what they want to see in venture funds.

For example, some things LPs will want to know:

How will this fund attract and secure quality deal flow?

Will I have the opportunity to co-invest in high-performing portfolio companies?

Are the fund terms LP friendly?

What’s the opportunity cost of delaying a commitment to this fund?

How would investing in this fund impact the risk and return profile of my portfolio?

In comparison, founders might want to know:

How can you help me with sales and go-to-market?

Have you built a startup yourself?

How do you treat founders when times are tough?

How can you help me optimize and scale my efforts?

Let’s suppose you have a 30-day program that can scan founder brains, identify areas that are under-optimized, and provide 30-min daily practices that can activate more of their superhuman potential. Let’s also suppose that the program can be scaled to their executive and employee teams at very attractive unit economics.

While this unique value-add may very well maximize the chances, your portfolio founders build winning businesses — who is this most important to? Founders and their teams. For LPs to consider this a value-add, you might have to frame it differently:

Amplifies deal flow.

Tech-enabled quality governance.

— choose the frame that speaks to your audience.

The converse is true, too — suppose you have a data-engine that can help you identify and secure pre-seed investments very early on, monitor those investments carefully, and track the big winners. Suppose your fund economics allows you access to invest larger amounts in those winners at a later stage of financing, and you extend that opportunity to your LPs to co-invest. That’s a great value add for LPs — they can maximize their gains! However, is it essential to founders? Yes, yet, it has to be framed differently:

Follow-on investment.

Access to later-stage investors to make your fundraising efforts easier over-time.

In summary: when communicating your unique value proposition, understand who you are communicating it to and what is important to them. Everything about your fund might be fantastic, however, if you don’t frame and communicate it effectively — no one will know!

5: CHANGING FUNDRAISING AMOUNT MID-RAISE

Imagine you are an LP responsible for a multibillion-dollar pool of capital, and you are always on the lookout to meet with promising emerging fund manager talent. Let’s suppose a trusted contact provides those introductions and correctly vouches for that emerging fund manager, his/her track record, credibility, and core values.

You meet the emerging fund manager, and he/she communicates the fund strategy and process clearly, and answers your questions transparently and with respect. Then, after the meeting, you receive an email from them saying that they have decided to change the amount they are raising — what does that signal to you?

Likely, a lack of clarity and discipline. While this might not be the case — remember, LPs will err on the side of caution. Broken trust and unintended negative signals can limit access to pools of capital.

6: UNCLEAR RATIONALE BEHIND A SPIN-OUT

It has become challenging for LPs to differentiate one venture fund from another. While GP spin-outs can be positive signals because of experience and time working together, you must also communicate:

What is unique about the proposed new fund?

How does that unique point of difference deliver value to LPs?

Why couldn’t you have delivered that unique value in the pre-existing fund?

These questions are easier to answer if your new fund comprises two partners spinning out together from different pre-existing funds. However, if the partners come from the existing fund, you must have a strong, transparent, respectful rationale for why the spin-out makes sense.

SUMMING THINGS UP

To gain the trust and confidence of LPs, especially institutional investors who are typically more risk-averse — be transparent, patient, and disciplined. While everyone has a different risk-profile, everyone agrees that it is a good idea to maximize rewards and minimize risks. If you find yourself in doubt, I suggest going back to first principles:

Demonstrate the potential upside to founders, LPs, and key ecosystem players.

Address key risks and explain how you (team, process, strategy, technology) de-risk those items to key stakeholders.

Demonstrate your team’s capability to execute on the opportunity.

Create a compelling reason for stakeholders to act immediately.

Build relationships and pay-it-forward whenever you can — you never know how it will come back to you.

Care for your overall well-being — mental, emotional, and physical.

Be transparent about your fund’s short-comings, personal past failures, and, more importantly, your plan to correct/compensate for areas of weakness over time.

Being a proper steward of capital is a long-term game you play with trusted, long-term people — if you are aligned with this ethos, I am confident you will enjoy this exciting journey!