Key Takeaways
- The LP base of a VC fund determines the fund's constraints, timeline, and interests.
- Founders should understand who their VC's LPs are because those LPs influence the VC's behavior.
- Aligned LP and GP interests produce better long-term investment behavior for founders.
Most founders do not think about the LP base of the venture funds they raise from. The LP base, the limited partners who provided the capital that the fund invests, shapes the fund's investment behavior, its timeline preferences, and its response to portfolio company challenges in ways that are invisible in the term sheet but real in the relationship.
Saim Abbasi built Iron Key Capital's LP strategy with a specific thesis about what kind of capital creates the best partnership with early-stage founders.
Strategic LPs Versus Financial LPs
Venture fund LPs come in two broad categories: financial LPs who invest for return, primarily, and strategic LPs who invest for both return and strategic benefit from the portfolio. Strategic LPs, who might include corporations, family offices with specific domain interests, and high-net-worth operators in relevant industries, can provide portfolio companies with customer access, partnership opportunities, and domain expertise that financial LPs cannot.
How LP Constraints Affect Founders
A fund with institutional LP constraints, university endowments and pension funds that have specific return timeline requirements and risk limits, will behave differently during a portfolio company downturn than a fund backed by patient family office capital. Understanding the constraint structure of your VC's LP base tells you something about how the VC will behave when things get difficult.
The Alignment Question
The best LP structures for early-stage venture funds create alignment between the fund's interests and the founders' interests over the full duration of the investment. Saim's goal at Iron Key Capital is to create an LP base that allows the fund to be a long-term partner to founders, providing follow-on support through multiple rounds rather than pushing for exits before the company has reached its full potential.
"The LP base of a fund is a hidden variable in every term sheet. Founders who understand it make better partnership decisions."