🎧 How to Attract Emerging LPs: A Guide for GPs

This week I talked to David Zhou, Head of Investor Relations at Alchemist Accelerator, to understand who emerging Limited Partners (LPs) are and what motivates them, and how General Partners (GPs) can raise capital from them.

Over a year ago, David wrote “The Non-Obvious Emerging LP Playbook”, which has become one of the best blog posts on the somewhat obscure world of Limited Partners, the money behind the Venture Capital industry. 

Since then, David has become one of the best community builders in Silicon Valley, focused on helping emerging Limited Partners think and invest like the most established Limited Partners. David also hosts a fabulous podcast called Superclusters, focused on demystifying the world of Limited Partners.

Learn about emerging LPs today:

Spotify | YouTube | Apple Podcasts

🗒 Show notes:

[09:20] - WTH Are Emerging LPs?

[25:48] - Why it's So Hard to Access Big Funds

[36:33] - Product Market Fit For Funds

[45:32] - Your Response Rate Can Win You Deals

[49:56] - Funds Can Pivot Too

[54:12] - What It Means to Be Specialized

🧠 Key Takeaways

#1 Be Prepared to Educate Them: Emerging LPs are in very different segments: high net-worth individuals, family offices, fund of funds, IRAs, etc. What they have in common is that they have little to no exposure to the world of Venture Capital and want to learn about it. Be willing to answer questions every week and put time into helping them, because that is one thing you can provide that the Sequoias of the world don’t have time to. 

#2 Don’t Over-Sell Your Results: If you’re pitching that your fund has 110% IRR on paper, that might impress emerging LPs, but maintaining that expectation in reality won’t be possible. A better approach would be to be realistic with your metrics and upfront with what worked and didn’t work. This will help you gain their trust.

#3 How You Communicate Matters: As a GP, you want to “win” LPs over. One way to do that is to be consistent with your communications. If you say you’ll update them once a month, keep that promise and always send the email on time. And when they contact you, be sure to respond in the least amount of time possible. If you keep them waiting, they may think you’ve lost interest in them and start looking elsewhere. 

😲You won’t hear this anywhere else

“Should a fund be pivoting? There are some LPs that say, ‘no, they should never pivot. They pitched me a 10-15 year strategy, and they should stick to it’. And there are other folks like, ‘how do you predict what's going to happen in 10-15 years?’. In my opinion, funds pivoting is okay. If you were able to predict what happens 10-15 years from now, you would make so much money, and be a freaking genie.

That said, if you do want to pivot, I think there should be preemptive communication. You should first tell your LPs ‘I'm seeing the market grow and move in that direction, so we want to bet 10-20% of the strategy on that. Are you okay with it?’, and then execute the pivot. But, keep it at 20% max. If you need to pivot more than 20% of your fund, you either should give that money back and raise a new fund on a new strategy, or limit your exposure because there's a lot of shiny object mentality in venture.”