Difficulty of Securing Funding From A Brand-Name LP?
@BentRover 's post about GP's potentially rejecting an LP was one that I found quite interesting. This piqued the question in my head, what is the difficulty of securing funding from a reputable/brand-name LP in the case that one wanted to start a VC/PE fund? What are some reasons behind a LP wanting to invest in a new fund? And what would be reasons for rejecting a GP?
Not fully familiar with the PE world so these are questions that I'm wondering.
There are a few reasons why LP's invest in a new fund. If its a new fund where the GP's spun out of a major shop ( i.e. a reputable large well know PE fund ) then LP's tend to follow that talent. That leads to access- access into a very talented fund manager is sometimes hard for LP's, therefore if they get in early to a new fund, they are seen as partners rather than LP's. GP's might also cut them some slack on fee's for being an early investor. Another reason LPs like new funds are performance. Historically speaking, smaller VC funds tend to have better performance than the bigger funds. LP's would reject a GP for a number of reasons, I could spend all day writing about that. It mostly comes down to how that LP defines their asset allocation strategy ( i.e. what strategies to invest in, performance % targets, fees, transparency, reporting, etc ).
But what if the GP's came out of a smaller PE fund? Wouldn't they be somewhat looked down upon because the LP's don't believe they can be successful?
Could you provide some statistics for this? I've heard differently in that the smaller funds tend to struggle and don't see those large returns that the big funds (Sequoia, A16z, Accel, etc) get to see. Like wouldn't it be much harder for a smaller fund to get in early in startups that actually have a chance?
First time managers in a first time fund is extremely difficult and very difficult for an LP to invest. If the managers come from a smaller shop but have done a number of successful deals, then it makes it easier for an LP to understand. However, if its a number of managers that have never worked with each other before, an LP will put you on the radar screen to watch the progress of your team/portfolio. Then you have to factor in investment strategy and opportunity- if a smaller manager has an unbelievable straightforward strategy with some early results, an LP will be willing to invest if it makes sense/is a differentiated compelling enough opportunity. In regards to BIG vs SMALL deals that funds can access- larger funds invest larger tickets/$$$ in companies and cannot for performance reasons access smaller opportunities/certain companies ( just refer to the typical healthcare investments in VC example). You invest 50 million in a company- it has to yield a really big exit for a larger fund to make up those returns versus a smaller fund which can get in smaller sized deals for a couple a million and look for a modest to unicorn exit scenario. All in all- smaller managers who are looking to raise their first $100 million sized fund is really difficult, you need the right marketer, contacts, performance, team, operations, legal, etc etc etc to prove to LP's you are ready to become an institutional sized manager. It's the hardest thing to do if you dont have the right resources or team put in place.
One more thing. Larger funds cannot access smaller companies because of a pure investment return perspective. The Sequoias and NEA's are not looking to invest 10 million in a smaller tech or healthcare firm as it doesnt move the needle for them. They often are hunting for the next big tech, software, drug, biotech, giant Unicorns which leaves a lot of compelling opportunities for smaller to mid sized managers.
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