Limited Partner (LP) or not LP …that is the question
Angel or Limited Partner? Investment can be a funny old game. You win some and you lose some, or so the popular saying goes.
Snagging that lead investor
Here’s an excerpt from a conversation between C.Richard Kramlich and Mauree Jane Perry on August 31, 2016.
Source: C. Richard Kramlich, “Venture Capital Greats: A Conversation with C.Richard Kramlich”
MJ: So, let me get this straight. You’re talking about us putting up a million dollars, right?
R: Yes, sir.
MJ: You’re talking about not telling us how you’re going to invest it, is that right?
R: Yes, sir, that’s correct.
MJ: And you’re telling me, you all, as a group, have no track record, and you’re not promising any rate of return, is that right?
R: Yes, sir, that’s right.
Finally, Mauree Jane Perry, LP, said:
“Well, if you all feel comfortable taking the risk, I’ll support you.”
What happened? The above LP invested $1 million in NEA Fund 1. If this isn’t blind trust I don’t know what is. Of course this is much easier when it’s a conversation between just two parties, as is often the case with LPs. And then there’s the obvious thrill factor that drives many into this mode.
Passive investment is your game?
Perhaps the most important question though is that if you end up losing, HOW do you lose? If you’re interested in investing in a VC as a Limited Partner(LP), there are many plus points.
Usually as a passive LP, on the plus side as the majority stakeholder (usually the case in Public Equity funds) you can expect a larger return come what may. If the business you have invested your money in, proves successful, that is.
But what does it really mean to be a Limited Partner?
Richard Kramlich’s conversation snippet above more or less sums it up in a nutshell. If it’s control, access to your money and regular updates on the status of your investment that interests you then the message is simple – it’s not for you!
And that is what you get if you invest in a VC fund as an LP. It’s called passive investment for a reason. Because it is exactly that. What kinds of funds are these funds usually? Pension, Family Office, Endowment or Foundation and a Fund of Funds, such as EIF.
Wide spectrum of risk-taking choices
Being an LP does, however, mean that you have variety. You can invest from aggressive, early stage VCs (high risk), to growth equity funds (medium risk), and up to later stage PE funds (very low risk, if any). Basically, structure and and rules-wise it’s the same kind of investment. But still very different in philosophy – something that for an angel investor is generally very hard, or even impossible, to do.
The Angel or corporate way
If we compare the description above to what it is to be an angel or corporate investor in one or more companies, the difference is stark. An LP is a passive lone wolf. Angel investors and corporate investors are the lively wolf pack, moving together and casting their net – or claws in this case – as wide as possible. This means investing in various companies so that if/when one of them fails, it can be mitigated by a success elsewhere in your portfolio.
And this is the very essence of the win-some-lose-some philosophy. If you don’t place all your eggs in one basket, then you don’t risk dropping that basket and breaking all those lovely eggs. Because remember, they definitely can’t be put back together like Humpty Dumpty again!
