How often are strategic Limited Partners able to add value to a private equity or VC fund?
I’ve found that if you are a smaller, early-stage VC, then having “Strategic” LPs that can write a larger check into the next round can be very valuable.
The key here is if it will work in practice, and if they have a track record of doing so. A lot of LPs want to do more “direct” investments, but don’t have the infrastructure to actively manage all the start-ups within the VC firms they invest in. If you are an LP in 20 funds, each with 20 investments … that’s 400 start-ups to try to keep track of. This is too hard.
What I’ve found works is having a handful of relationships here than you keep actively updated each quarter, with a heads-up on why the good ones are doing well, where they will be in 3-6-12 months, and precisely which ones might be good investing opportunities for each LP — and when.
If you making it more of a slow dating dance, than merely a quarterly update, you provide large value to all 3 parties:
- The start-ups can find a potential next round investor easily, and earlier. Or someone to round out a round.
- The Strategic LPs have more time to get to know the start-ups.
- And for the GP, the VC fund … having a few good folks that consistently follow you substantially de-risks your portfolio, and makes life easier, with less drama.