"I'd love to get into venture"
"My first investments are up 20x and I still haven't gotten a carry check"
— Jason ✨BeKind✨ Lemkin ⚫️ (@jasonlk) November 9, 2020
How do micro VCs find LPs to invest in new venture capital funds?
If you want to raise a venture fund — doesn’t it look glamorous? — there’s a line of fund size. The line is how big a fund you can raise from individuals, and when you need traditional “Limited Partners” (LPs) like endownments, pensions, fund-of-funds, etc. That line has gone up, but you probably will need traditional LPs to raise a fund much bigger than $40m.
So how do you find them, these LPs? And how do they find you?
This answer has quite a bit of privilege in it — but the answer is warm referrals:
- There are now 1000s of micro VCs funds out there. Thousands. This is way, way too many for almost any LP to process.
- The average LP will add 0–2 “new names” per year. Because the obligations stack up. It’s usually at least a 2 fund commitment, and then more if the funds do well — 4+ fund commitments.
- LPs want proof points and ideally a track record. The less of a track record you have, the more time they want to take to get to know the manager. And again, there are 1000+ other managers out there …
- So as an LP you can only add so many new ones per year, and that probably means only taking a handful of new funds seriously as investments.
So how does an LP pick from 1000+ new funds?
- Run by a GP or proven investor they already know. This is the “easy” one these days. Many LPs will fund the top GPs at their existing fund investments if they spin out to start their own firms. They’ll at least take it very seriously. The diligence is mostly down.
- A very strong referral from one of their top managers. I got my second largest LP — a very large check, relatively speaking — from a very warm referral from one of their top managers. But it has to be a very strong referral.
- LPs track a fund for Fund II. Many LPs will also track a manager and see how it goes, for a change to invest in Fund II.
Yes, this makes it really hard to break in. The best hack here is to find a second partner with more of a track record. Because LPs really want a track record before they commit. At least, as much of one as they can get.