Discussion

LP’s are the lifeline venture capitalists depend on, at least in most cases. LP’s come in many colors, shapes and sizes. Emerging firms often begin with unsophisticated friends & family capital and evolve into adding professional, institutional investors. What are some of those differences and how can an emerging manager manage these different relationships efficiently?

There is an association of Limited Partners, the Institutional Limited Partners Association.

The metrics for reporting to LPs has become partly standard and partly an act of seeming more sophisticated than the next fund manager. A leading indicator that’s trendy is Total Value to Paid In Capital (TVPI), though sophisticated LPs know that TVPI is only loosely predictive of Distributions to Paid In Capital (DPI).

Some LPs suggest tracking how large an exit price would need to be to return the fund, the Return the Fund Exit. What about half the fund? 20% of the fund?^[1]

Tips and Tricks

• LP Perspective (Northern Trust):

• Annual meetings:

  • Focus the message on the impact of the fund: what are you doing/solving for? (e.g. impact on x # of patient lives, etc.)

    • Can poll LPs beforehand to ask about top-of-mind issues (e.g. what are top 3 diseases affecting your family right now)

  • Remember it is an opportunity to spend quality time off site; avoid hotel conference room where people can go in/out

• Know your investors. Some want meetings, some want coffee, some want structured reports in person. Know your investors as people and do a monthly touch base and do reports and always have one golden nugget for each portfolio company to tell investors at all times. (Zeynep)

• Have an email update to your LPs when you speak at credible events. (Atomico)

• LP Perspective: Be patient with LPs; follow-up with they follow-up (Northern Trust)

• Craft your Annual General Meeting (AGM) so it is consistent with your brand identity. (Atomico, Learn Capital)

• Tack on a community event over the weekend to your Annual General Meeting so that LPs have the ability to authentically connect with your portfolio and other key people in your network. (Learn Capital)

Case Study from TRPE Ventures: Exceeding Expectations on Quarterly Reporting to Limited Partners

Zeynep has found data-driven quarterly investor reporting specifically useful under following circumstances:

• First Time Fund Managers: Since the fund’s relationship with its LPs are relatively new, a written investor’s quarterly report where both the progress of portfolio companies’ and the fund are highlighted, creates trust through information flow.

• (Very) Early Stage Investing: When investing at very early stage, anxieties over the overall status of the company tend to be high. Sharing information when investing at this stage, helps with managing “how are the companies doing” anxieties.

• A ‘Growing’ LP Mindsest: In ecosystems where majority of the allocated capital to venture capital consists of first time LPs, having a quarterly written reporting schedule establishes professionalism and an ease of setting the context, as written quarterly reporting is a practice that is aligned with their other business practices.

• Keeping active and helpful LPs up-to-date: If you have a LP group where, some LPs are active and willing to support companies through making connections or referrals, keeping such LPs up-to-date with the status of the company and what the company is tackling recently creates value.

Suggested Information to be Included in the Quarterly Reporting Format for Early Stage Investing:

1. Company Overwiev: Short description of what the company is doing

2. Board of Directors: Names and titles of the board members

3. Company Key Person Contact Information: CEO or investor-facing spokesperson

4. Company Size: Total number of employees

5. Company Timeline and Milestones Charts: Having a ‘timeline’ chart where the reader can understand the monthly progress of the company numerically, mapped with major events or milestones achieved, is helpful. Depending on the nature of the company, the numerical data could be key metrics such as number of downloads, subscribers, tenants, … etc. ‘Key events or milestones’ could be finalizing an investment round, launching a new version of the product, closing a big deal, winning an award, … etc.

Below is an example from a two years old crowdsourcing platform company.

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1. Quarter Highlights: Depending on the nature and the stage of the company, quarter highlights could include items below.

   1. New Customers Invoiced

   2. New Demo Customers Acquired

   3. Major Hirings

   4. Major R&D Updates

   5. Major Product Updates

2. Quarter Summary: Include charts and explanations on 3 company-specific key metrics.
   Tip: Be thoughtful on providing the monthly revenues of the companies in these reports. Especially in the first 12 months of a company. The small-size or the lack of revenues at early stage companies might create concern in LPs who are first time investors in a fund investing in early stage companies.

3. What is next for the following quarter: Give a 3 bullet point key issues, milestones, or targets that are aimed to be achieved in the following quarter. This is for your investor’s to know what the company will be working on until the next report is due.

Case Studies

Highlights