If you’re a new VC fund seeking investments for the first time, you are bound to make mistakes. While experience is a great teacher, there are a handful of common errors that are easily preventable with the right knowledge and resources.
In our last DiffuseTap session, we had the chance to talk with Investor Relations expert Luba Lesiva, former head of investor relations at Palantir Technologies currently raising funds for ex-Palantir employee lead startups on Angelist, about first-time funds, what they’re missing, and how they can avoid novice mistakes. She shared five great tips that no GP should miss.
1. Know your LP’s portfolio
GPs know what it means to have a portfolio of startups. However, they often seem to miss the fact that LPs also have a portfolio of their own. Which means that as a VC you are fighting for capital allocation with each of these other investments.
“If your LP is a high net worth individual or a family office, you’re actually competing against public market investments, bonds, real estate investments in developments, and whatever is in their 401k that they got from their job when they were 23.”
Keeping this in mind, think about what exactly your LP wants out of your relationship. Are they investing for purely financial reasons? Do they want to get operationally involved? Or is this investment a thrill? If you don’t know, don’t be shy to ask what else they have invested in and where they see your fund’s strategic fit.
2. Understand your LP’s deepest fears
High maintenance LPs have long been a problem amongst GPs. Sometimes it’s a high net worth individual that made a quick investment decision and was great throughout the fundraising process, but now he or she is calling you every six weeks for an hour-and-a-half conversation, asking about the most minute details on your portfolio’s performance.
The reason such high maintenance LPs exist, Luba shares, is that they are in need of reaffirmation. The key to helping high maintenance LPs is tackling the underlying concerns of their clingy behaviour.
“What you really have to figure out is the real question they’re asking. The real question is not ‘I want to talk to you for an hour and a half every six weeks.’ The real question is not ‘I want a site visit to every one of your portfolio companies every six months.’ The real question is ‘I don’t feel secure with this investment. I’m nervous about something.’”
Perhaps their concern is related to a fund that just blew up in their portfolio due to interpersonal issues. Or maybe they have a direct investment that went under because of fraud or mismanagement. You have to address these concerns directly. Once you do, this will improve your relationship with the LP and they will need a lot less of your time to feel at peace.
3. Know the right time to bring an expert on board
Engaging a skilled investor relations manager with significant experience in the field will definitely help your fund. But not every fund needs one right off the bat. Bringing an expert in too early, when you’re still solidifying your investment thesis, can create more problems than outcomes.
“You can’t bring someone on board super, super early. Because in the first few years, you don’t know what your fund is going to look like. You have a thesis, but you still have to prove that. And you will find yourself tweaking it a little bit. So you’re going to find yourself micro correcting every step of the way.”
Similarly, you also don’t want to bring in an expert investor relations manager too late. This can create rifts in your early investor relationships, Luba says.
“If the LP has had a direct relationship with you for seven years and committed to two funds and you turn around like, ‘oh, by the way, going forward, you’ll only be talking to Luba over here,’ they will feel a little cheated. So you have to bring someone on board who handles investor relations early enough so that it doesn’t feel like a bait and switch to the LP.”
4. Set up an air-tight tax structure
Not having a well thought-out tax structure can cause more no’s than you think. Your tax structure is one of the biggest decision factors for LPs, especially institutional investors that are not headquartered in your geography. It is also a crucial step most new funds miss.
“When I was at the Abu Dhabi Investment Authority as a VC, there were funds that had great theses. In fact, one of them was a fund that I used to be an investor at. Regardless, we walked away from it because the post-tax returns didn’t make sense. The fund manager was just not able to allocate a tax structure that made sense. And so, we walked away after the second meeting because it wasn’t worth proceeding with the discussion.”
5. Start the sales cycle as early as possible
The LP sales cycle is long. Realistically, Luba says, the whole cycle takes a year, so you want to start as early as possible. Not only for a sooner close, but also to get as much feedback as possible to improve your thesis. Luba says that one thing you can do to start the sales cycle early is to start even before having a deck.
“I actually recommend going to potential investors without a deck. Going as early as possible and saying ‘I’m thinking about this. This is what I think the thesis will be. Does that sound plausible to you?’ and getting as much feedback from that is a good strategy. So when you fully launch with a deck, the LP is not surprised.”
At the same time, doing this lets you build rapport with your potential investors.
“They’ve been along for the ride as you’ve been building this out, and they’re like, ‘Oh, that’s right, I told you to do this. I gave you some feedback, you incorporated my feedback. And now you’re doing it. You’re someone who learns from reality on the ground. And you’re someone who does what they promised to do. Those are great things in a fund manager, I feel reassured.’”
While becoming an established VC fund is no easy task, your ride can be so much smoother if you understand your LP’s motivators deeply. From thesis to funding is a long road, we hope these five tips will let you build stronger and more in-sync relationships.
Meet The Speaker
Luba Lesiva is an equity specialist with a strong background in investor relations. In 2016, she founded L4C, a startup consulting firm that helps early stage tech companies with fundraising and cap table management. Prior to that, she served top roles in several financial services and tech companies, including head of investor relations at Palantir Technologies and VC at Abu Dhabi Investment Authority. Today Luba is raising funds for ex-Palantir employee lead startups on Angelist.