Nikhil Kapur
Photo credit: Pixabay.
First up, I’m sorry. This was supposed to go out last week, but I’ve been busy obsessing over the minute details of our LP meetup. Finally, we finished with the meetup this week, hence this post.
The VCs’ bosses
For the uninitiated, LPs or limited partners are the cash behind a VC (venture capital). These are usually corporates, individual investors, government funds, pension funds, fund of funds, and so on, representing large pools of capital who diversify their asset allocation into a high-risk, high-return businesses. Since they do not have the time to manage an active investment asset class like VCs themselves, they invest in funds or GPs (general partner) who execute and manage these investments on their behalf, and in return give them a commission on the earnings (carry) apart from a base salary (management fee).
To cut the long story short, even VCs have bosses and these bosses are our LPs. VCs fret over finding good, long-term, and experienced LPs who believe in their vision and story. And once they have found these LPs and convinced them to invest in the fund, they fret over the results and the returns they can generate for the LPs. We do this, not just because we need to give returns for the money we invested, but because if we don’t, we won’t get the LP’s check for the next fund.
The LPs don’t meddle in the day-to-day activities of a fund, but they do give feedback usually every year. Then, they do make a choice on whether to come back into your next fund based on the decisions you made in the last fund. A VC fundraising process and the annual meetup with the LPs is like a startup fundraising process and an annual shareholders’ meeting. It’s that one day of the year where we have to shed our hoodies and sneakers for a suit and tie (or in a startup founder’s case, the day you take a shower).
On a side note, most VCs hate wearing a suit and tie. So did I. Mark Suster even has a post about it here. But this week, after the meeting, I realized its importance. It’s a great reminder—the annual meeting, the suit, the tie, the presentation, the whole shebang—as to the fact that we are responsible for managing someone else’s money, and if we make bad decisions, (every VC makes these, by the way) we have to answer to someone. It’s a humbling reminder that a giver is a taker as well, and the world always completes a full circle.
