The Limited Partner Landscape - With Jeff Weinstein of FJ Labs

Each fund you raise is going to require a different outlook and perspective on attracting and maintaining Limited Partner relationships. However, there’s no such thing as a perfect, all-purpose LP.Finding the right LP requires an intimate understanding of what each of your current and upcoming funds will look like, as well as what value an LP can provide beyond the capital.We connected with Jeff Weinstein, a Principal at FJ Labs who also heads the firm’s LP fundraising.FJ Labs is an early-stage venture firm/startup studio focused on online marketplaces and consumer Internet companies. The firm has backed over 500 companies including Alibaba, Betterment, Delivery Hero, Fanduel, and Flexport, and has been directly engaged in building companies such as AdoreMe, Merlin, Letgo, and Rebag.This is the first article of a two-part series where we go over the LP landscape and what venture funds across various fund stages should focus on (part 1), and ultimately finding the perfect LPs for your organization (part 2).

The Limited Partner Landscape

It is important that you cultivate the right LP relationships from day one because you’ll hopefully work with your LPs across multiple funds, each spanning a decade. As a GP, you are ultimately responsible for crafting a healthy and productive working relationship.

Fund I 

Venture capital GPs typically raise their first funds from friends, family, and high net worth individuals. Investments typically range around $50,000 to $1M.That being said, "if you’re spinning out from a well known VC fund and have a fairly successful track record, you can go after institutions.”A typical Seed-stage Fund I without a track record usually raises $10-$50M consisting of friends, family and some family offices. Some funds may also speak with progressive fund of funds investors and endowments.

The most important fundraising strategy for Fund I is differentiation. 

"There has been an explosion of new Seed funds recently,” comments Weinstein. “They all claim to have proprietary deal flow, and that they can see and win the best deals. As a manager, you have to emphasize why you’re different.”“LPs are constantly inundated with decks. The winning pitch is one of specificity. Start with a sector, business model or geographic focus. For example, FJ Labs focuses on investing in online marketplaces, so we pitch our expertise in understanding marketplace and our track record of building and scaling online platforms.”“If you have an angel investing track record, own that as part of your identity. Make sure that your track record is carefully documented, with supporting evidence. We were fortunate to have a great angel track record prior to raising our institutional fund, so this helped demonstrate our investing acumen to LPs.”“However, the buck doesn’t stop at a differentiated story to LPs. Let’s say you’re focusing on investing in eCommerce Series As. Why are you going to win this deal? How are you going to compete with other investors? Just like you have to pitch LPs to raise money, you are going to have to pitch founders to take your money, and LPs know this. So it is important to find a way to explain your value-add to founders. As an example of this, we are close with a fund that invests pre-seed and will build out tech platforms for their companies.”You should also gear your value proposition towards the type of LP you want to attract. For example, offering frequent co-investment opportunities can be a big incentive for family offices to invest.It’s important to note that LPs often don’t want to invest in single-GP funds given the concentrated key-man risk. While it’s possible to raise a fund like this, it will be a significantly tougher climb.Fund II“A typical Fund II might range in size from $30M to $75M and typical sources of LP capital come from family offices and some forward-thinking institutions.By this point, hopefully, Fund I is maturing and you have some early successful exits.”Fund II usually focuses on vision. It’s built on the back of Fund I, and showcasing your successes and developing track record is key. Allow your current and new potential LPs to see your success, how you won x% of deals, what percentage of your deals raised follow-on rounds, etc."Family offices can typically write $1M to $5M checks,” notes Weinstein. “They’re typically more flexible and have different goals.”“Corporates are also starting to invest in venture funds, but they aren’t necessarily primarily financially minded– they're doing it for strategic purposes. They care about seeing companies that will potentially disrupt their current lines of businesses, scoping out future lines of businesses without heavy internal R&D involvement, and companies they could potentially M&A."Another trend is that many fund investors are also dabbling in direct investment, and sometimes like pursuing co-investments as an open option. So some VCs are willing to offer pro-ratas or excess pro-ratas.A few red flags for LPs to watch for when evaluating a Fund II are team changes and style drift. If a fund invests in a specific mandate, stage, or sector, LPs won’t necessarily want GPs to deviate from that, or to dramatically alter their deployment period. Also, LPs definitely don’t want to see GPs leaving or dramatic team turnover.Fund III and Beyond“Fund III largely focuses on performance. You’ve been able to raise Fund I and Fund II based on storytelling and vision, but at this point, investors will want to see demonstrated investment returns.”Fund III and Fund IV are when GPs can typically start talking to institutional investors such as fund of funds, endowments, consultants, pensions, etc., These funds tend to have longer upfront due diligence processes, so raising capital takes some time. However, these are typically larger checks and more patient sources of capital, typically aiming to invest across multiple funds.Endowments often work with consultants to advise on their private equity and venture capital allocations. Cambridge Associates, the most famous and largest PE/VC consultant, has over $1T in advised AUM, and will do due diligence on behalf of large pensions and endowments. They also work with very large family offices. Consultants serve as gatekeepers for endowments, doing much (if not all) of the due diligence and benchmarking for institutions. They can make or break your fund. If you are on a consultant’s preferred managers list, it can drive you hundreds of millions of dollars of demand. However, when you work with institutional investments, you may lose some control and flexibility, as they care a lot about managers sticking to their predetermined mandates, may require the existence of (and a seat on) an LPAC (limited partner advisory committee), and are particularly sensitive to style drift.

Which LP is Right for Your Fund?

Finding the right LP largely depends on the profile of your fund. In a majority of fundraises, the partner you raise capital from can be more valuable than the money itself.FJ Labs, for example, has found a lot of value in working with corporates.“FJ Labs will have over 250 companies in our current fund, and corporates love it because they’re getting a ton of exposure to a variety of sectors, business models and geographies,” notes Weinstein. “Being an LP with FJ Labs gives them access to emerging trends and deal flow they otherwise wouldn’t have access to.”Every organization’s investment strategy appeals to a specific category of LPs, and every LP provides a unique value to every fund stage. Being keenly aware of who your capital is coming from and what LPs’ intentions are is a major advantage for anyone looking to raise money.