- Limited Partners
Intimacy and Transparency: 3 part series on VC/LP relations
In the opening chapter of Adam Grant’s “Give and Take”, Grant reminds us about the opaque nature of the venture business just 2 decades ago at the turn of millennia. Since then, we’ve seen an explosion of literature developed with the strict purpose of demystifying the venture capital process. David Hornik began blogging in the year 2000, Brad Feld of Foundry Group wrote Venture Deals in 2011. Fast forward to today and founders and investors, both near and far, have greatly benefited from the cornucopia of knowledge (oftentimes available in 160 characters or less) that has dramatically increased transparency across the industry. At Kauffman Fellows, we sit at the center of a network of 600+ leaders in the venture space, many of whom are partners taking the leap at their own venture (over 100 VC funds have been founded by Kauffman Fellows). Many of these Fellows who are currently out there raising or maintaining their fund (everyone) will tell you that the VC/LP fund businesses today can feel as opaque as it was 20 years ago. And so, in an effort dive deeper into and illuminate the relationship between general partners at venture funds and limited partners, we’ve begun this short series on VC/LP communication and relationship building with an LP that regularly works to demystify these relationships – Chris Douvos of Ahoy Capital. Part 1 starts off with three high-level principles that Chris believes is a cornerstone for VC/LP relations. Part 2 and 3 will dive into more tactical ways to execute on those principles.
From his website: Chris is a pioneering investor in the micro-VC movement and 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; and his brick oven pizza parties, small gatherings of LPs, GPs, and entrepreneurs, are well-known in the Valley. He is sought after not only for investment capital, but also for his advice, and serves on numerous managers’ advisory boards.
Principle 1: We’re investing in people that make decisions
Good limited partners need to (like all good business people) put a lot of effort into building a deep understanding of not just what GPs do, but how they do it. They are investing in “people as an asset”, says Chris, “as we don’t have the luxury of products or business plans”. Likewise, when the average venture partnership today lasts longer than a typical marriage in this country it becomes even more critical for LPs to know who they are investing in – from their values to their decision making process. From Chris, “We’re investing in people that make decisions – we need to understand the decision engine, an amalgamation of their behavior footprints, where they are most comfortable, and uncomfortable. Understanding all those things helps me get closer to the person’s decision engine and tends to be very illuminating and can make a difference.”
The average venture partnership lasts longer than a typical marriage in this country
Principle 2: Develop intimacy with us over the course of time
LPs have to gain a deep understanding of the GP, the product, and the decision engine behind it all. Chris believes one of the best ways to help investors achieve that deeper level of understanding is to engage in frequent, authentic, meetings, with each other over a period of time. “A lot of GPs are too transactional, particularly the ex-operator background VCs, there sometimes tends to be this expectation that we will invest right there… trust me, we won’t,” says Chris, “having a number of interactions over a period of time will help me better evaluate someone, through different time periods, experiences, and the motions of life”.
Principle 3: Transparency is key to building trust
Lastly, during the relationship building process, Chris believes that VCs need to be open and transparent about themselves and the business during each touch point. Too often, during the early days of an LP/GP relationship he tends to see, “a lot of GPs feel the pressure of fundraising, and experience the pitfall of exaggerating past history and portfolio success”.
“The key is to be transparent,” says Chris, “let us under the hood, there’s nothing wrong with good marketing, but please don’t over exaggerate”.
What do the returns look like, and when will they come in
Part 2: Tactics
In the next article, we will take a dive into the details of communication frequency, annual meeting presentation, pitfalls, how to gracefully navigate shortcomings, quarterly updates, and key metrics to watch.