When most people think of venture capitalists, they often think of investors, the people writing checks to fund startups. But that image is only one part of venture capital.
In order to make those investments, venture firms must first have the money, which means they’re not only just the funders, they’re fundraisers, too.
But when you’re running a VC firm, especially as an emerging manager, how do you know which investors and limited partners (LPs) to target?
After more than 30 years of investing in both private and public companies, I’ve now started as a fund manager, and I recommend that emerging managers ask these five questions before seeking out and pitching to potential LPs.
Which LPs are you targeting?
" Each step up the decision-making ladder increases the risk of dismissal, lost information or miscommunication, which can be mitigated if you can get in front of the decision-makers early on. "
Emerging managers can also target niche investors: for example, if you’re investing in education, a like-minded foundation might be a potential LP, or if you’re investing in medical technologies, you might try to connect with hospitals that could benefit from those innovations.
After launching Avestria in 2019, we found that family offices and high-net-worth individuals were the best targets for us.
Their investment requirements aren’t as stringent as institutional investors or FOFs’, and they’re willing to accept the risk of investing in an emerging manager in exchange for potentially high financial returns.
How well do your target LPs understand your investment thesis?
Emerging managers should find out how well their potential investors already understand the unmet need your fund is addressing. The venture capital community has significant influence on what potential LPs see as great investment opportunities.
As a result, capital can be concentrated in certain areas. In 2020, now-defunct video platform Quibi alone raised almost 8% of the total funding that female founders got that year.
We often have to explain the white space: Women of child-bearing age weren’t allowed to participate in clinical trials, even for products meant for women, until 1993.
Even 30 years later, only 4% of all healthcare research and development is meant to address women’s health issues.