So you want to be an LP?
I recently caught up with a great emerging manager and Recast Capital Enablement Program alumni, Yohei Nakajima, Co-Founder and General Partner at Untapped Capital. As of late, both Yohei and I have been repeatedly approached with the same question: There is so much exciting momentum in venture capital today, how can I or my organization get involved as a Limited Partner (LP)? Yohei recently shared his thoughts on the subject in a Twitter thread, and we decided to put our heads together to write a piece about it. We offer suggestions to those new to the game on where to start, why we believe the emerging manager space is a promising place to play, and share resources that will help you better understand and connect to innovative funds with the potential to drive outsized returns.
How do I get started?
To get started, get a lay of the land, which will depend on where you are in your journey, and how much experience you have in venture capital. (“None” is perfectly fine, by the way.) There is an abundance of insightful information out there on the LP perspective. For broader market intelligence and data, Pitchbook and other venture-focused databases share helpful reports. We also like #Open_LP for curated articles and expert insights across the entrepreneur/GP/LP/venture ecosystem. Also, a great podcast by Notation Capital: Origins, which features a diverse range of LP and VC interviews. We at Recast have also shared our perspective on the space in a recent interview.
So the job is to get into [insert brand-name fund], right? Wrong.
Historically, the general guidance has been to back renowned, industry-leading venture funds, and if you can’t, well, grab your bat and ball and go home. But times have changed. There are few, if any, spots in those institutional funds, and minimums are high. Now, if you can get allocation in a blue-chip, established manager, we’re not going to tell you to walk away. If you can’t do it directly, one way to make it happen is to go through a Fund-of-Fund (FoF) product focused on the established players. (But large FoFs have minimums, too.)
What’s important to know, however, is that the list of top performing venture funds is not a static list of ten established players. Emerging funds have proven to perform equally well if not better than their long-established counterparts. Not only is the emerging manager space a great area of focus for the potential outsized returns that everyone seeks from their venture portfolios, but it can also be easier to access — and with smaller checks.
How do I know which emerging managers to choose?
It’s based on a combination of factors, including but not limited to strategic ties, areas of interest/passion and risk tolerance. You may be a Family Office (FO) that knows the construction industry well and prefers funds in that space. You may invest because you want an information advantage on a specific sector of the market and access to direct deal flow. You may just love crypto and want more exposure. Or you may want to build a diversified portfolio of funds.
The emerging manager space can feel like a sea of “sameness.” At Recast, we’re looking for contrarian — truly differentiated offerings that have the potential to outperform. More specifically, we need to see evidence that the manager has what it takes to identify the best companies in their area of focus, win those deals, and provide post investment value by bringing their skills and networks to their underlying portfolio companies. This creates a flywheel of entrepreneur referrals that feeds that manager’s success.
How do I make the right connections?
The world is full of ways to connect with emerging managers: Twitter, LinkedIn, blogs, conferences (for example, All Raise, Bridge and RAISE Global), the list goes on. Not to mention, anyone who describes themselves as an emerging manager or has recently started a VC fund is most likely in the process of fundraising. Reach out to those funds which interest you. (You’re likely to be met with an abundance of positivity!) If the VCs you happen to speak to aren’t raising, chances are they know somebody who would welcome your call. Most VCs aren’t legally permitted to publicly solicit investors, however some are structured to allow it (and therefore can be easier to find), including AngelList’s rolling funds.
Yet another good source are thought leaders who run educational and/or other programs for emerging managers; we’re confident that they’ll happily connect you with the funds they work alongside. Examples are VC Lab, Oper8r, VC Include and our very own Recast Capital Enablement Program, each a great source for potential referrals.
How much should I invest?
This depends on your individual financial goals or those of your firm. If you’re an early backer of a small (think $1–5M) fund, you might — repeat, might — be able to get in at even just $5k. Generally speaking, for a $10M+ fund, $25k is considered small, given that most early-stage funds need to average $100k+ per LP commitment.
It goes without saying that many emerging managers would love more! If you’re an institution that is capable of writing larger checks, you may find yourself with a competitive advantage when it comes to oversubscribed funds.
I love this approach, but I’m not sure I can execute. Who can help?
Individuals, FOs, and other institutions may be drawn to emerging managers, but face challenges accessing them: for example, the individual’s/FO’s/institution’s typical check size is too large to invest in these smaller managers, there is a lack of diligence expertise, and/or lack of breadth of team or individual bandwidth to efficiently cover the emerging manager sector.
There are several options available to assist. To start, emerging manager-focused FoF products can be remarkably helpful, not to mention provide diversification in one shot. There are also new platforms like Revere and Allocate, and @lolitataub and @joshtaub created this great tool that matches LPs with underrepresented GPs.
Recast’s & Yohei’s Tips for New LPs
A few thoughts as you get started:
- If you decide you don’t want to invest in a particular fund, a fast but thoughtful response is best. The GPs’ time matters, too.
- Considered and constructive feedback is always welcomed.
- Be kind and respectful. Word gets around.
- Have fun! The underlying portfolio of these managers are run by incredible founders changing the world. Follow along and get inspired 🙂
A big thanks to the LPs who continue to support new funds, build programs and develop educational resources. Recast is proud to stand shoulder-to-shoulder with you. Second, a big thanks to the GPs who are always willing to share their insider knowledge with new GPs in the business.