Check out part 1 for insight into how LPs think about investing and part 2 of this series for tactical advice on how VCs can execute on making it clearer for them.
In this last part of Intimacy and transparency: VC/LP relations with Chris Douvos, we dive deep into common pitfalls that VCs and their firms oftentimes fall into when engaging with LPs during the fundraising process.
Common VC Pitfalls when talking to LPs:
A quick reminder: Chris Douvos has been a fixture in venture capital for nearly two decades. In addition to successfully identifying and catalyzing nascent funds, he bridges a gap between the providers of capital and the consumers of capital by creating platforms for transparent dialogue. Chris authors the blog SuperLP in which he chronicles his adventures investing in venture capital and private equity. He is sought after not only for investment capital, but also for his advice, and serves on numerous managers’ advisory boards. Below are some of the pitfalls he’s experienced, navigating the LP/VC world for over 2 decades.
Do not be too transactional:
As we discussed in part 1, LPs are trying to build relationships and understand the team intimately. A venture relationship lasts longer than a typical marriage in the US so it’s important to know who you are working with. LPs want detail on your overall story and career arc. They want to understand your investment decision making and portfolio deeply. This cannot be done in an hour phone call and requires effort for both parties.
Don’t get confused. Your timeline is very different from an LPs timeline:
Many LPs have a very long term point of view. In VC, we get accustomed to very short timelines. Some VCs go from meeting a company to wiring money in as little as a few days. This works because VCs can have some 0X returns – they make up for it in the big winners. But for LPs, their risk / reward is very different. A losing fund can change their portfolio’s returns pretty dramatically. And Chris says, “In many cases, we want to know a VC for a fund cycle or more before committing to a fund.” VCs need to make sure they have that same long term thinking when meeting with potential LPs. Many times you’re building a relationship with an LP for a fund years in the future.
Do not feel pressure to be overly optimistic about your results:
Sometimes when VCs chat about their portfolio, everything is a “10x this or 10x that”, says Chris, “when there are too many x’s, LPs know its BS.” Douvos believes it is better to be conservative than overly optimistic. This is particularly important from a long term relationship building point of view. LPs will get to know you mean what you say and trust goes a long way in this business.
“When there are too many X’s, LPs know its BS”
A lack of authenticity & humility during difficult times:
Not every investment will be a 10x. As a GP, you have to invest time into communicating and getting ahead of potentially negative outcomes. And Chris says, “If you only see your LP when things are bad, that’s not healthy. You have to build a track record of honest engagement and humility is very important, having a clear-eyed vision of how things could have gone differently makes a big difference in how an LP sees you. There is no education in the second kick of the mule.”
Keeping firm relationships and junior team members guarded:
LPs often look for outside perspectives and want to chat with referrals. Sometimes this means speaking with junior people at the firm. Junior team members can give LPs insight into the pulse of the institution. If their optimism shines through then there is nothing to worry about. If not, you may need to reconsider your management style.
Communicating your unfair advantage:
Make your unfair advantage really clear to LPs. Many LPs need to be spoon fed the strategy and you may need to be very explicit on the connection between various activities. If you start with your unfair advantage – and the LP clearly understands you – it’s a good start.
“There is no education in the second kick of the mule”
And that’s a wrap. Chris has been an absolute boon to our understanding of interactions with LPs. Navigating this type of unique relationship is challenging but Chris shows us that with the right tool kit, by being transparent, intimate, portraying a movie, and regularly staying in touch with LPs, anyone can reach shore. If you missed Part 1 and Part 2 click to read.
Do you have any questions for us or Chris? Reply here and we will try and get them answered.
Written by Collin West and Nihar Neelakanti