The LP perspective
Throughout the tech reset, we’ve spoken to some of Europe’s leading LPs about how managers can best the fundraising market. Here’s our core learnings.
David Dana
EIF
Christian Röhle
KFW Capital
Michael Sidgmore
Broadhaven Ventures
Joe Schorge
Isomer Capital
Chris Wade
Isomer Capital
Ertan Can
Multiple Capital
Daniel Schex
Ex-Finva
Philipp von dem Knesebeck
Blue Future Partners & Vinthera
Tej Panesar
Prism Ventures
Ameer Awadiyeh
AQVC
Jeroen Van Doornik
Pacenotes
Niels Fritze
Scale Invest
Lindsay Sharma
Industry Ventures
Kemper Ahl
Industry Ventures
Sharif El-Badawi
Dubai Future District Fund
Lara Koole
Carbon Equity
Leverage the tech reset
While raising through the tech reset obviously can be challenging, our LPs remind us that it’s also a time for opportunity.
People are willing to re-up with existing managers ’cause it’s easier to do so, and they have familiarity, but new relationships are taking longer, which I think is, probably net positive. It means that allocators, their funds or companies have a chance to build relationships and actually properly evaluate the opportunity in the business relationship.
In this current environment, we see a really interesting opportunity as it relates to our secondary strategy [… and our] tech buyout fund, where we’re really looking to capitalise on this growing cohort of venture backed companies that are exiting to buyout funds.
This is one of the most exciting times for us as a firm, I think perhaps in our history. I know that a lot of folks in our market probably don’t feel the same way. I think most folks have seen some sort of reset coming for a while now, and it’s probably healthy to some degree, but for us, it’s going to create a massive opportunity set.
Be differentiated
Joe Schorge emphasises the importance of VCs applying the same product development principles they advise founders to their own funds. This means clearly defining the fund’s unique value, target audience, and competitive edge in a crowded market.
Ask yourself why you are really differentiated and what uniqueness you really bring to the table.
If you don’t have an existing track record, fundraising might be an uphill battle. A track record can be compensated by exceptional vision and talent in many ways, but what gets me interested is somebody doing something truly different.
Think about your fund like a product. We don’t do that enough. VCs are always advising founders on their product and how to build a better product. Think about it: what value does it add? What are the key features? Who wants to buy it? What are the margins? Apply that same logic to your fund. Why does the world need another fund? There are already too many funds.
We are not shy about backing first-time teams, but we will not back a first-time team just for the sake of having a new player on the market if it doesn’t bring anything different. Meaning that we have backed a lot of investors. We have a huge portfolio. There are lots of VCs in Europe. If it’s just about adding a new team, which will just come and compete against all the other ones, it will not make sense for anyone.
Fundraising is a storytelling exercise and focusing on what differentiates you in the market is really important. It’s tough to try to think of any sort of secret weapon for fundraising. Every strategy is a little bit different. Every manager knows their own strengths. Knowing how to highlight those and convince others that they make you different is really key.
Navigating cornerstone LP engagements and getting the terms right
Throughout our conversations with LPs, we’ve often spoken about how to navigate your LP interactions and get the terms right from the beginning.
Watch the full video below for all the nuances, or read the core learnings for a quick overview.
Key learnings
Adherence to market norms
The European venture capital ecosystem, significantly influenced by entities like the EIF (European Investment Fund), has developed standardised terms that facilitate the investment process for LPs. For emerging managers, sticking to these norms rather than attempting to innovate on fund structure is critical. The rationale is to make the investment process as seamless as possible, removing any barriers that might deter potential LPs. This principle is underscored by the understanding that simplifying the investment journey can greatly enhance a fund’s appeal to a broader range of investors, particularly those who might be hesitant to engage with complex or unconventional fund structures.
Strategic considerations for early traction
Emerging funds often seek initial commitments from within their close networks, sometimes offering inducements to secure these early investments. While this can be effective for achieving initial momentum, fund managers are cautioned to be judicious in these early offerings. Preferential terms offered to induce early closings can later pose significant hurdles when attracting institutional investors, who may view such discrepancies as indicative of a fund’s lack of broader appeal or institutional viability. Thus, maintaining a delicate balance between securing early commitments and preserving the fund’s attractiveness to a wider investor base is paramount.
Balancing flexibility and standardisation
While there’s acknowledgement of the room for negotiation, especially with cornerstone investors, maintaining a commitment to industry-standard terms ensures that discussions focus on the substance of the fund’s strategy rather than the minutiae of terms. This approach underscores the long-term impact of term negotiations, advocating for flexibility within the confines of established norms to avoid setting precedents that could adversely affect future fundraising cycles or the fund’s strategic positioning.
Focus on alignment
The construction of fund terms is framed not just as a negotiation over financial mechanics but as a foundational element of the GP-LP relationship. This relationship is ideally viewed through a long-term lens, with terms designed to ensure alignment of interests. This includes considerations around carry structures, where deviations from standard terms are carefully scrutinised and justified by past performance or mutual benefit. The discourse highlights a shift away from short-term optimisations towards fostering a partnership ethos characterised by equitable sharing of risks and rewards.
Governance for fund autonomy
Particularly for VC funds emerging from family offices or similar entities, establishing governance structures that affirm the fund’s operational independence is crucial. These structures not only enhance the fund’s appeal by reassuring LPs of its autonomous decision-making capacity but also serve to align the fund’s operations with best practices, ensuring equitable treatment of all LPs.
The imperative of transparency
Transparency is heralded as a cornerstone of integrity and trust in the GP-LP relationship. Open disclosure of the fund’s operational mechanisms, potential conflicts of interest, and special GP-LP arrangements facilitates constructive discussions and preemptively addresses issues that could undermine the fund’s credibility. This commitment to transparency is especially pertinent in mitigating concerns over conflicts of interest and ensuring that all LPs are accorded equal consideration and respect.
Conclusion
By adhering to market norms, judiciously navigating early inducements, balancing negotiation flexibility with adherence to standards, focusing on alignment, and ensuring independent governance and transparency, fund managers can enhance their fund’s appeal, operational integrity, and long-term viability. This holistic approach not only aids in successful fundraising but also lays the groundwork for sustainable growth and enduring partnerships within the competitive landscape of venture capital.
10 tips to avoid and deal with bad LP behaviour
During my time on both sides of the table, I’ve thought of a few tips that might help navigate bad LP behaviour when we encounter it. While not a definitive list, I hope it will be of value.
As I write this, I’m also conscious that we at Isomer interact with hundreds of funds every year and are able to commit to only a few. We’ve built Isomer on the principles of being a fair LP to all. Nonetheless, inevitably, sometimes the human process fails and we do not communicate effectively. Just know that below is how we want to work with our potential LPs and how we strive to work with every GP we meet.
01 Expect easy come, easy go
It is our observation that LP relationship development takes time (some may argue too long, but then again, these are 10-year+ partnerships being considered), so when an LP arrives stating they just need a few weeks to review materials, then probably the alarm bells should be ringing.02 Do LP due diligence
Often, when we meet a first time manager, we are immediately on the pitch about why the world needs this new fund, and how they have all the right experience and team and a proven track record. I always smile when I meet a new manager discussing their 3rd or 4th fund.But there’s a set of questions that the best managers also get into: “How are you? And how’s Isomer doing? What are you looking for at the moment? Do you have investment capacity?”
In other words, they do a lot of DD (due diligence) on us as a prospective LP. Just as a good founder will do DD on a future VC, we need to be more comfortable with DD on LPs; any unwillingness to answer questions or vague responses should probably be telling.
03 Share LP experiences
LPs are precious and should be preserved in the inner sanctum of your fund’s crown jewels. Sharing your experiences one-on-one with the other GP managers is one of the best ways to help our industry highlight time wasters. For example, during the recent VC funding boom, many new LPs came to market with capital propositions for GPs, failing to mention they had to raise a fund. We have many stories of such behaviour; it is not our MO to be public about this. While we don’t publicly name and shame, if GPs ask, we will point them in the right direction and encourage others to do the same.
04 Ask for “the order”
We are not good at asking, “Are you going to commit to my fund?”We find all kinds of proxies for the same question: “Do you need any more information?” “Would you like to meet other LPs?” “How are your commitments going this year?” etc.
I recently met a senior potential LP who knows us well and is positively inclined to us and asked the following: “How are you thinking about VC commitments in 2024?”
He looked at me with eyes that said, “What are you asking?”
“Well, what I am asking is: would you consider committing to us this year?”
What followed was a helpful and encouraging answer. Dare to ask.
05 Understand where you are in the LP process
In the dance to acquire an LP, there are two definitive stages:01 Does this fund fit our investment thesis, strategy, or deployment plan?
02 If yes, when do we want to complete the DD, and if successful, join the fund?
Determining where you are in this process is crucial, as it lets you focus your LP wrangling appropriately. There is no point in discussing close dynamics if the LP is at stage 1.
06 Understand who the decision makers are
Determining who are the decision makers and whether there’s an external investment committee process is important. LP-ego can somewhat get in the way here. The person you are talking to will want to be considered the most important, so offering to meet a broader team in the LP organisation is a good question. And, if denied, is a good clue as to where you are in their process.
07 Agree to investment process timescales
When it’s clear you are in Stage 2, it’s helpful to agree on the definite and frequent steps to the LP being admitted to your fund. Regular steps aim to determine if all is planned to happen as agreed. As strange as it sounds, LP bad behaviour often occurs at this stage and is annoying as your expectations are high and you’ve maybe been high-fiving over gaining a new LP, and then they disappear.Being professionally demanding when timing goes off plan seems counterintuitive to the friendly LP wrangling approach, but good LPs will respect it, and you will determine the bad one sooner.
08 Manage your time
When discussing LP decisions, we sometimes say the second best answer is no because you can stop wasting time on a non-productive LP and move on to someone who might give you capital.
09 Protect your information
Data rooms take a long time to prepare and have a lot of commercially sensitive data that should be protected. While NDAs are an option, all they do is add to a moral obligation rather than anything more helpful to recover your data. A more useful protection is offering access to the data room only when the LP has shown interest and spent time with you and your team, i.e., not as an initial LP engagement tool. Tracking the data room activity once an LP has been given access is another good way to determine LP interest in your fund.
10 Consider the current environment
Finally, to state the annoyingly obvious; we live in challenging times, affecting LP’s ability to conclude fund commitments. In this environment, LPs can start with good intentions and then have to stop the investment process. It’s important to state that this LP volatility is not necessarily bad LP behaviour if it is communicated in a timely manner.
I hope this gave you some insights you can use in your fundraising. We all stand on the shoulders of giants; let’s help each other get to the next level.
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