What sort of LPs should I look for if I am building my first fund?

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JASON LEMKIN

It’s not like picking VCs. You’re going to need a bunch (10+) most likely, it may take quite some time, and so that will change how you to do it.

But some things to think about:

  • Most LPs do not invest in first-time managersMost don’t, but some do.  If an LP only invests in established funds, you are probably mostly wasting your time.  Building relationships does matter, so meeting these LPs in not a total waste for later.  But it’s close to a waste of time.
  • Two-fund soft commitment LPs are much, much better.  LPs that want to make a soft two-fund commitment up front are much better.  This won’t be in writing.  You will have to earn it.  But assuming you do — you get the second check.  They’ll tell you.
  • Size appropriate.  Think in 5-10% chunks per LP.  Many big LPs only write $25m-$50m+ checks.  That may sound nice, but also, they only want to own ~10% of a fund max.   So many LPs that do Big Funds really can only invest in $250m+ funds.  That’s probably not you.  So none of these LPs will really work out for you.
  • Funds-of-funds have evolved, but can be great.  The fund-of-funds LPs have evolved, and shrunk, in number and $$$.  The ones that are left are the best ones.  They have a huge advantage over other LPs — they can move really fast if they want to fund you.  Because in one or 1.5 decisions, they can deploy underlying capital for a bunch of LPs in one fell swoop.  And some actively want to work with first-time managers.
  • High Net Worth Individuals are the worst LPs.  Look, all money is green.  But rich people investing directly … not a family office, or with a fund vehicle, but directly … is in general the worst.  They don’t make a 2+ fund commitment.  They get nervous.  They consume a lot of your time.   But.  They don’t mind first-time managers.  And again — the money is green.

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Published on February 14, 2016
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