What are the qualities that LPs look for in a GP for a venture fund?
They want the close-to-impossible:
- 25-30%+ historical IRR,
- delivered on cash-on-cash returns
- with the subset of partners that actually delivered those returns (because most don’t)
- still the key partners going forward
- but that they aren’t too long in the tooth, or too successful, to remain motivated; and
- that the firm still is A-tier and perceived as A-tier.
This is basically impossible, to have it all. It does happen sometimes, but usually by the time it all comes together, best case, you often see a “generational transition” to the next group of partners running the firm, which introduces a whole new level of risk.
So being an LP is hard.
The reality is, like a VC, you have to make a trade-off and pick which risks you are most comfortable taking?
- Established funds. It can seem less risky to re-up for Fund V in a known entity with decent historical returns. But that doesn’t mean Fund V will do as well as I and II. That was a long time ago.
- Paper returns. Mark-ups are nice, but without cash-on-cash returns of 3x or more, you haven’t really proven anything.
- Unicorn hunters. Just because you had a few hits last year, that might mean you actually led those deals 7–10 years ago. Are you still fresh? What have you done for me lately?
- Hot, new managers. Yes, she has 2m followers on Twitter. Yes, she angel invested in Uber, Stripe, and Twilio. But an angel investment of $25k is not the same thing as a VC investment of $25m.
You can’t have it all. And if you try to get it all, you are looking at the past as much as the future.