As a startup founder or fledgling business owner looking for funding, few things are as important as establishing the type of investor that you are looking to secure your money from. Limited Partner investors (LP), for example, or an alternative source, such as an early-stage pre-seed investor.
Why? Because who you get your funding from, is likely to determine in a big way how you run your business; or soon-to-be business. In short, your fundamental business strategy needs to be aligned with their investment strategy.
Of course we are leaving Venture Capital (VC’s) to one side for this discussion. That’s, because it’s not so common for a fledgling startup to go straight to seed funding stage with such an investor; not without having first cut its teeth.
So, what exactly do you need to know about Limited Partner investors? Let’s get some definitions out of the way.
What exactly are Limited Partner investors?
Limited Partner investors are usually “passive” investors. The clue is in the title, “limited”. The title typically refers to their legal status in Venture Capital funds or Private Equity funds. They’re practically partners in such a fund, but with limited rights and obligations.
Investopedia’s simple definition says more or less everything you need to know:
A limited partner is a part-owner of a company whose liability for the firm’s debts cannot exceed the amount that an individual invested in the company. Limited partners are often called silent partners.
Silent. Another clue. Basically, limited partner investors typically invest money in exchange for shares in a partnership. But, they have restricted voting power on general company business; and little to zero involvement in the day-to-day running of the business.
And so, limited partner investors are not so interested in control. Nor to access to their money and regular updates on the status of their investment. This is not to say that they have no interest at all of course.
Bottom line though. A limited partnership is for you if you need to raise capital for your startup from a small group of investors and you want to retain full control. Especially the 3F’s (family, friends, and ‘fools’) — or people in your community.
Where to find an LP and how to engage them
Surprisingly, or unsurprisingly — depending on your experience as a contemporary entrepreneur, limited partner investors are not actually that hard to find.
The best place to start is from within your own network, and/or the fringes of it. Depending on what you were doing before you had your Eureka moment and put your energies into founding a startup, you may already have an extensive network that is just waiting to be tapped into. And this can be beyond the 3F’s. So first, exhaust all of those avenues in terms of contacts, and those trusted ‘friends of a friend’ who are looking to invest in a startup’ before you expand your search.
Expanding the search for your Limited Partner investor
You can find potential limited partner investors at startup accelerators or incubation hubs; that is, both in your local area, or farther afield in nearby cities. Just search and you will find them. Also, there are a number of free databases out there. For example platforms such as Pitchbook, Capmatcher and Preqin provide information on investors of all types from around the world.
While the contact details in such database-type platforms mentioned above may be out of date, and the response rate to emails may be hit and miss, usually the fund information is accurate. And this can be used to identify and draw yourself a shortlist of relevant prospective partners.
Of course there are also a myriad of events, such as conferences, summits, and webinars going on (even in virtual format during this Covid-19 era) in the United States; and across popular startup hubs in Europe such as Lisbon, Berlin, and here in Athens. Starttech Ventures’ #ScaleUpGreece events are also a place where you can meet with potential LP’s. So get yourself out and about, but remember the difference between networking and not working.
Standing out from the crowd
But if finding a potential shortlist is one thing, engaging with them is a big next step. As you can imagine, plenty of others are reaching out to them for the same reason you are. And so you need to convince them to trust you with their cash. The most important thing is not having the perfect pitch. Although it will help you. You basically need 1. A compelling story that is easy to understand, 2. Show how your product/idea solves a crucial problem, and 3. Show the well-thought out business model that backs 1 and 2 up – with numbers and data.
Obviously all of the above helps your future limited partner investors to see the real need for your proposition. Also, remember that any LP’s decision to invest in your startup is also a decision to invest in you. So you need to prove your expertise, and introduce them to your team (if you have any other members). That’s so they can get a feel for you as a character.
Seek and you shall find
As you have probably understood by now, finding limited partner investors is not as tough as you may expect. It’s the engagement part that can be extremely tricky. That’s why you simply need to make sure you have all your ducks in a row, as they say.
If you remember just one thing from all of the above though it should be the following. Don’t just try to secure the first thing you see. No matter what stage you are in in terms of launching your startup or fledgling business, you need to make sure you try to pick a limited partner that is suitable for you and the company you’re hoping to build.
Want to know more about raising funds for your business? Check out our guide to all the prerequisites to get you to seed funding.