You spend a massive amount of time pitching venture capitalists. You worry about their investment thesis and their board involvement. But founders often overlook where that money actually comes from.
It does not usually come from the bank account of the partner you are speaking with.
It comes from a Limited Partner.
A Limited Partner, or LP, is an investor who commits capital to a venture fund. They are the money behind the money. While the venture capital firm makes the decisions on which startups to back, the LPs provide the liquidity to make those checks clear.
Who Fits the Profile
#LPs are rarely individuals writing small checks. To make the economics of a venture fund work, LPs are typically large entities with significant assets they need to diversify.
Common examples include:
- Pension funds
- University endowments
- Insurance companies
- Family offices
- Sovereign wealth funds
- High net worth individuals
These groups invest in a VC fund as an asset class. They are looking for high returns to balance out safer, lower yield investments elsewhere in their portfolios.
They are generally considered silent partners. They have limited liability, meaning they can lose their investment but are not responsible for the debts of the fund. In exchange for this protection, they usually do not have a say in the day to day management of the fund or specific investment decisions.
LPs Versus General Partners
#It is vital to distinguish the LP from the GP.
The General Partner (GP) is the venture capitalist you meet. They work at the firm. They source deals, sit on boards, and manage the portfolio. They have unlimited liability and are responsible for the active management of the fund.
The LP provides the capital. The GP provides the labor and expertise.
Think of it like a restaurant. The GP is the chef and manager running the kitchen. The LPs are the silent backers who paid for the stove and the ingredients but never step foot in the kitchen.
The Impact on Founders
#You will likely never meet the LPs of the fund that invests in you. However, their influence is present in every board meeting.
LPs invest with specific time horizons. A standard venture fund has a ten year lifecycle. The LPs expect their capital back, plus significant profit, within that window.
This structure creates the pressure you feel as a founder.
If a VC fund is in year seven of its lifecycle, the GPs are under immense pressure to show liquidity to their LPs. This can influence whether a VC pushes you to sell the company early or swing for an IPO. They have bosses too, and they need to show results to raise their next fund.
Questions for Founders
#Understanding the LP dynamic allows you to view your investor relations through a scientific lens rather than an emotional one.
It opens up questions you should consider during diligence:
- Where is the fund in its lifecycle?
- Are the LPs institutional or individual?
- Is the VC firm currently raising a new fund from their LPs?
Knowing the source of the capital helps you predict the behavior of the investor.