🎙 NEW PODCASTS 

Eric Sippel - Lessons from Investing in 45 Venture Capital Funds

Listen to this episode on Apple Podcasts or Spotify.

Morgan Creek Capital’s Endowment Style Investing - Frank Tanner

Listen to this episode on Apple Podcasts or Spotify.

Dave McClure & Jordan Stein on YC, “Spray and Pray”, and Games VCs Play

Listen to this episode on Apple Podcasts or Spotify.

📖 DEEP DIVE

What is LP Value-Add?

What makes a great LP?

Is it an LP who pays premium fees and carry? Is it an LP who invests into co-invests?

The answer is No.

A great LP is someone who helps a venture capital fund turn into a venture capital franchise.

What does this mean?

Wealth in venture capital is created “slowly”, it takes 7 years to create wealth in venture capital (I know, tough 🤨).  

By year 7, if a fund has done everything right that fund will enter their 3’rd vintage, and by this time, a fund manager can expect to have anywhere from a $150M-$300M fund size.

In management fees alone, a $300MM fund will deliver $50 Million or so to the GP’s - risk free.  In fact, the only way to avoid collecting on the $50 Million in management fees is typically by committing fraud.

This, of course, creates fund size misalignment between GP’s and LP’s, but I digress..

How exactly do LP’s help GP’s in their journey from a Fund I to a Fund III??

The answer is multifold. 

LP’s provide value:

1. By providing brand signal to the GP
   
   Nothing can be more credentialing to a fund than having a top LP.  
   

2. By being a good thought partner
   
   All LPs have opinions, but only few LPs’ opinions are rooted by being in the asset class over several decades.
   
   The ideal scenario for a GP is that an LP has a lot of great feedback and is willing to share it freely. 
   

3. By opening up their rolodex to GP’s

   Great LPs will create a syndicate around the fund that will support the fund through multiple vintages.
   
   Any LP can invest in bull markets, but it takes the right syndicate to carry a fund through a bear market which is very likely to happen over a 7-year fund timeline.

   Great LPs are non-zero sum thinkers and bring alongside other great LPs into emerging managers.

This is what matters when it comes to LP value-add.

If you want to make it far as a venture manager, it is important to optimize on the long term and ignore the temptations to focus on LP’s that do diligence quickly, diligence, co-invest into SPV’s, and pay premium fee structures and focus on choosing long term capital partners that will help you build a real franchise.

Until then 🫡

✍️ DAVID’S BOOKMARKS

• A16Z backed startup pays a dividend 🤯

• CalPERS is getting active in the VC Game 💵

• Sam Altman cashes in $600 Million on Reddit’s IPO 📈?

📈 CHART OF THE WEEK

🛠️ EMERGING MANAGER TOOLS

• Chris Harvey for fund counsel 

Reach out to Chris at [email protected].

• AngelList for fund administration

Get in touch by emailing the team at [email protected].