Check out part 1 of this series for advice on how to help an LP gain a clearer understanding of your decision-making process.
In this second part of Intimacy and transparency: VC/LP relations with Chris Douvos, we dive deep into the actual output LPs want to see from their GPs. Meaning quarterly emails, annual meetings, communication frequency, metrics your current LPs care about, and common pitfalls, with the goal of deepening the communication and relationship between VCs and LPs.
Existing LPs want the broader context
Chris believes that the best communication with existing LPs helps them calibrate the things they care most about when making an investment: How much money are we going to get back, and when are we getting it? He believes that the best quarterly updates and in-person meetings should contribute to an ongoing movie-like narrative, rather than portray a single scene. For example, some fund managers will purely report what happened: “This last quarter we invested in companies A, B, and C.” What Chris really wants to hear is, “We invested in companies A, B, and C, as part of X strategy, and we see the market evolving in Q, R, and S ways. Our existing investments are performing in the following way, and we believe that our fund performance will be most impacted by companies D, E, and F.” While time-consuming, a more detailed report, even if done semi-annually, can serve as a touchstone for future discussions and demonstrate a track record of managing and exceeding expectations.
“How much money are we going to get back, and when are we getting it?”
Include events and expectations in quarterly updates and metrics
For quarterly LP updates, Chris wants to see event-driven information such as portfolio news, exits, and new investments. He also wants to know what’s working well, what is not working well, and expectations on the timing and magnitude of returns. Chris says, “It is very helpful when a GP can report on a portfolio company and say, ‘We think this could be an M&A / IPO event over the next 12 to 24 months, and given our ownership, we think that using the following assumptions, we could enjoy a 6-10x on upside or 2-3x on downside.’” Some of Chris’s best GPs include a low/med/high case for each company, which flows into the overall fund return expectation, although sometimes this level of detail is shared only with the Advisory Committee.
Visit major existing LPs in person every 6 months
Both existing and prospective LPs invest in a relationship you’ve built over time, through many encounters, so it is important to continue to build a relationship with an LP, including regular visits. Those visits should include solid discussions of your progress.
One tip is to prepare a series of slides updating LPs on the firm, with goals and expectations for each portfolio company. Chris suggests GPs use a green, yellow, or red light denoting each company’s progress while highlighting how you helped each company. Then, show those same original slides at each in-person meeting in tandem with updates. This will help the LP see movement in your portfolio over time, and will also help highlight your catalytic impact on your companies.
Every communication or interaction with LPs should in someway reinforce your unfair advantage and how you’re deploying it – not in an overbearing way, but in a way that supports their internal mental narrative of you. – Douvos
Focus annual meetings on portfolio value and exit timing
At an annual meeting, Chris is focused on getting a good sense for the value of the portfolio and an estimate of exit timing. This information essentially answers his most important question: “How much money are we going to get back, and when are we getting it?” He also loves the metric RTFE (return the fund equivalent) used by one of his portfolio funds. For example, a GP could say for each portfolio company, “Given our current ownership, a $300M exit for this company is needed to return the entirety of the fund.”
He believes that with this communication strategy, LPs get a sense for the exit magnitudes required, and GPs also provide a window into a fund’s valuation discipline and risk tolerance. Chris also says many investment managers tend to over-diversify, and that, “this metric (RTFE) gives a window into the arithmetic of the fund, as well.” Finally, since annual meetings can “feel like a classroom all day,” Chris suggests more interactive discussions. For example, he has seen small group breakouts work for freewheeling discussions with a mix of portfolio executives, LPs, and GPs.
With LPs you want to:
- Paint a narrative of your portfolio and highlight the greens, yellows, and reds in the fund.
- Meet with major LPs regularly in person, perhaps every 6 months.
- Paint some color as to what the fund performance could look like given different scenarios and an estimate of exit timing.
- Hold annual meetings that are more interactive than a boring classroom setting.
That’s all for now—tune in for next week’s final episode of this three-part series on VC/LP relations with Chris Douvos.