Emerging managers should ask 5 questions before selecting LPs

When there are many people Think of venture capitalists, you often think of investors, people who write checks to support startups. But that picture is only one part of venture capital. In order to make those investments, venture firms must first find the money, which means they are not only funders but also fundraisers.

But when you’re running a VC firm, especially as a new manager, how do you know which investors and limited partners (LPs) to target?

After more than 30 years of investing in private and public companies, I’m just starting out as a fund manager, and I recommend that emerging managers ask these five questions before looking for LPs.

Which LPs are you targeting?

To find the right investors, you should first consider the investment criteria of LPS.

Institutional investors usually look for managers with a 10-year track record and at least three funds under management. Although Cambridge Associates data indicates that These investors may be hesitant to bet on emerging managers, given that 72 percent of the top returning companies between 2004 and 2016 were emerging companies.

Each step up the decision-making ladder increases the risk of being fired, missing information, or miscommunication, which can be minimized if you can get in front of the decision-makers early.

Managers who leave on their own after working with a previous fund can target FOF because FOF uses their track record as ex-employees as a proxy for independent experience. Emerging managers can also target potential investors: for example, if they are investing in education, a like-minded foundation might be a potential LP, or if they are investing in medical technologies, they can try to connect with hospitals that might benefit. From those inventions.

After launching Avestria in 2019, we found that family offices and high net worth individuals were the best targets for us. Their investment criteria are not as strict as institutional investors or FOFs, and they are willing to accept the risk of investing in an emerging manager instead to achieve higher financial returns.

How well do your target LPs understand your investment thesis?

Emerging managers need to know how well their investors understand the unmet need their fund addresses.

The venture capital community has significant influence over what LPs see as great investment opportunities. As a result, capital can be concentrated in certain areas. For example, male-founded e-cigarette company Juul received $10 billion more in funding in 2018 than female-founded companies combined. In the year In 2020, the now-defunct video platform Quibi alone raised nearly 8 percent of all funding received by female founders that year.

Our fund focuses on female-led life sciences and women’s health startups, and it’s sometimes difficult to rope in LPs with exposure to mainstream investment sectors like consumer goods or media platforms. We often have to explain the white space: women of childbearing age were not allowed to participate in clinical trials until 1993, even with products intended for women. Even after 30 years, it is only 4% of the total health care research and development. It is meant to address women’s health problems.

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