You know how important it is to establish strong relationships with your LPs. When you find a great fit, it’s likely to result in a long-term partnership. As part of a three-part series on venture capital-LP relations, the Kauffman Fellows Journal reminds us that the average venture partnership lasts longer than a typical marriage!
Ensuring that your relationships with LPs thrive over the long term takes work. You have to do your research upfront, and once you've partnered up, you have to take steps to foster trust and growth. Let's look at what steps you can take to support that growth.
Take the time to research potential partners
Masha Drokova, Founder and General Partner at Day One Ventures, has explained that LPs influence a firm’s culture and, therefore, a firm’s reputation.
Drokova emphasizes that an LP’s influence on your firm’s culture can, and will, impact how you build and maintain relationships with your portfolio companies. Their influence impacts the types of teams you attract and shapes the overall dynamic between you and your portcos.
When learning about potential partners, Drokova recommends that you learn about their values, their views of success, and their level of risk aversion.
Think longer-term
Chris Douvos, a pioneering investor in the micro-VC movement and author of the blog SuperLP, has explained that it’s important to remember that an LP’s level of risk is different than those of venture capitalists. VCs are typically much more comfortable with risk and, for example, funding a venture within days of the pitch.
Douvos explains that an LP’s risk factor means that they need to think longer-term. He adds, “In many cases, we want to know a VC for a fund cycle or more before committing to a fund.” It takes time to get them on board—don’t try to rush the process.
Douvos elaborated on his view in a Tweet, responding to a question about how to best match a new fund to partners:
Find balance
When it comes to LPs, balance is key. Barry Eggers, Founder and Partner at Lightspeed Venture Partners, described the importance of balance in a great article titled VC Firms — How to Build an LP Base for the Long-term.
Eggers advises venture capitalists to carefully construct an LP base. In a manner similar to evaluating a customer base or a portfolio, balance is very important. Assuming you have some leverage, Eggers offers a few suggestions for things to consider when choosing an LP.
- Don’t let any LP represent more than 20% of your fund
- Prioritize LPs that have their own internal source of capital
- Focus on LPs that have demonstrated a long-term commitment to the venture capital asset class
Establish trust
Although most common in the early stages of a relationship, LPs actively assess the trustworthiness of VCs. Take your time to demonstrate this trust because it may determine how likely they are to invest. The more an LP trusts the firms they invest in, the more comfortable they may be taking on additional risk.
When it comes to trust in these relationships, it’s especially important to not over-promise and under-deliver. In another piece in his series, Chris Douvos summed up this principle succinctly by stating that “when there are too many X’s [as in “10X”], LPs know its BS”.
Delivering on early forecasts lays the foundation for the trust needed to work together and build the business longer-term. Jo Tango, Partner with Kepha Partners, has shared some other common frustrations among LPs in a Series on Trust. When you're scaling your relationship with your LPs, here are a few things to avoid.
Scope creep
Be wary of branching off into new industries that you don’t have expertise in. Your LPs signed on with you because they trust you to know the reach of your firm. If you’ve exclusively invested in biotech, taking the leap into SaaS platforms might raise some yellow–if not red–flags.
Inconsistent strategies
You should be sending your LPs updates regularly. That data is valuable, and they can refer back to previous quarterly data points to make sure your strategies are consistent with outlines from months or years prior. Unless you have already shared the reasoning behind your dramatic changes, these inconsistencies can damage your relationship.
Lack of transparency
Routine updates should be consistent but they should also be high quality. Keeping your LPs up to date with relevant news from your firm’s activity (even if it’s bad news) is key to maintaining your partnership.
Be authentic and humble
If you were only to send good news to your LPs, you would be doing both parties a disservice. On the flip side, if you only see your LP when things are bad, you may damage your firm’s reputation and become too large of a risk. Having a clear-eyed vision of how things could have gone differently makes a big difference in how an LP sees you.
Chris Doukos adds that humility in LP relationships is invaluable. Be humble in difficult times. Be transparent. And do not exaggerate your past history and portfolio success.
Building a long-term relationship that is strong enough to overcome obstacles and thrive is a big investment in terms of time and effort. As important as it is to understand your LPs, it is equally important to have LPs that understand you and will help you and your firm develop. By incorporating these insights, you’re even more likely to stay aligned with your LPs and build a better business, together.
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