The venture business is all about culture, relationships, and reputation. Since launching my fund almost a year ago, I’ve learned that limited partners (LPs) will inevitably influence your firm’s culture in one way or another — and I think a lot about how to manage this so that we nurture our community in a way that helps our portfolio companies feel safe and grow.
For fund managers, an LP has much more influence than just cash in an account, especially in the early stages. For new managers, there’s always a temptation to quickly raise money instead of raising the right money. I love fundraising and think the right LP set and structure is one of the most interesting things about managing a fund. Here are the key elements you should consider when choosing individual LPs or family offices for your fund.
Visualize the long term
From the outset, it is critical to identify whether or not you as a fund manager and the potential LP share like-minded values. This includes, for example, your approach to decision-making and your relationship with truth. If you have doubts about the fit, it probably isn’t a good match for the long term. If they like to lie and you don’t, there’s no point doing business together. That’s not even because of ethics; it’s because these relationships will crash. If they want to have control and you need independence, you’ll also run into problems. Enter only relationships where your independence would be valued. For example, when choosing a limited partner, I first ask myself if I’m ready to respond to their text messages within a few minutes for the next 10 years of my life.
Take a hard look at values
There is a reason I feel so strongly about the values of my LPs. The influence that a limited partner has on your culture can, and will, find its way into how you build and maintain relationships with your portfolio companies and will impact the types of teams you attract. Having particular investors in your network — and in your life, to be honest — will shape the dynamic, again and again. If a limited partner has negative values, or doesn’t treat you well, that could rub off on you and how you relate to your own founders. Remember that these individuals became LPs because they are successful. When they enter your orbit, they give you a snippet of one version of success. Whether you realize it or not, you may begin to project different — and potentially contradictory — ways of thinking about success onto your portfolio. Another important thing to find out is their relationship with risk. It’s important to make sure you’re not pulled out of your comfort zone.
Make sure you understand each other
My rule of thumb when working with founders is that if I don’t understand them well enough to introduce them to other founders, or the media, I will not invest in them. I keep the same rule for LPs: In order to nurture a healthy culture, they must thoroughly understand us, and we must thoroughly understand them.
What we do should not be perceived as magic to potential LPs who don’t have a background in tech. Instead, as fund managers, we want to explain to them how venture capital works. Stepping outside of your comfort zone to better understand those who are different from you can result in unexpected partnerships that end up being the best, culturally, that you could hope for. The worst thing you can do is to sign up someone with a lack of knowledge about tech and venture. This is a path to nowhere as this person would not be helpful and can even harm your reputation not being able to explain why they made this investment.
Check that the timing is right
There is something to be said for partnering with the right LP at the wrong time. If the LP is the right fit culturally, but they just bought a house or made a major investment, perhaps it is not the right time. Even when I meet the right LP, I still ask myself if now is a good time based on what is currently going on in their life, or if I should be patient and wait a few months, or even one or two years. This has nothing to do with whether or not I’m impressed by the person or the opportunity. It can simply come down to changing priorities and the curveballs that life throws at us. Realistically, immediately investing in your fund is not an urgent life priority in most cases. Give potential LPs as much time as they need instead of forcing them into a relationship with you and your fund.
Don’t close off relationships with people who choose not to become an LP. You would be surprised at how many great things you can accomplish together if you don’t burn bridges every time someone doesn’t immediately invest in you.
Test the relationship
Beta test your relationships. If you don’t have any working experience with someone, try to do something small with them such as making an introduction or asking for feedback on your startup. See how they work and give them a chance to see how you work and think. Your direct experience working and collaborating with people is always the best way to find out if the relationship is going to work.
Look for clear value-adds in both directions
The investor’s culture influences their portfolio culture. Fund managers depending on the owner of the money to make decisions would be akin to editorial departments at media companies depending on the owners of companies to make decisions about what news they publish. Fund managers have to be independent; we get hired because we think differently, and this is how we help LPs come to the returns they want to receive. That special something in your approach to vetting companies or how you help portfolio companies grow should be based on shared values that enable you to add value to what the LP already has. If your investor sees opportunities in products for millennials and you’re a millennial with an investment background and experience working with these kinds of products, then the value-add is clear. If they want to invest in e-commerce for females and you’re a female with the right background, you would be a value-add.
Ideally, you want to have a few investors with strategic expertise in the fields you’re focused on and with access to valuable networks you don’t yet have access to.
Look for other benefits of working together
Half of the success of any relationship is results; the other half is the experience you share in working towards your shared goal. It’s important to work with limited partners who believe in this, too. When appropriate, and if the LP desires it, I’ve seen how amazing it can be to grow partnerships through inviting LPs into new deals, involving them in the reviewing of portfolio opportunities, or making an introduction when it can be valuable for their main business. It’s important to understand that your LPs hire you to do work for them, not to work for you. So make sure these activities are mutually desirable and interesting for them as well.
Above all, perhaps, it’s important to have LPs around you that you feel are developing you and making you better.
Get the number right
In general, you want to have between 10 and 20 LPs for your first fund, but you really can’t have too many investors. Keep in mind you need to be available to your investors and have time to share your work with them, and help them out when they’re in need.
The rules above helped me find investors who are extremely supportive. I couldn’t have expected how it would be to work together and how many times their advice has saved us. A great partner will bring you knowledge, connections, and ideas that make you grow. If it turns out right, you’ll get life-long partners and friends.
Masha Drokova is Founder and General Partner at Day One Ventures.