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What are the best ways to communicate risks and rewards of a VC investment to potential limited partners?

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As a venture capitalist, you know that raising funds from limited partners (LPs) is a crucial part of your business. LPs are the investors who provide capital to your fund, usually in exchange for a share of the profits and fees. But how do you convince them to invest in your fund, especially when there are many other options available? How do you communicate the risks and rewards of a VC investment, and what are the best ways to do so? In this article, we will explore some tips and strategies to help you pitch your fund to potential LPs and win their trust and support.

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Amit Mehra, CFA

Partner at BORDΞRLΞSS Capital
Gonzalo Martínez de Azagra
Matthew Craig-Greene

Your story, told better...brand, marketing, and IR for private equity and anyone else who needs it

1 Understand your LPs

The first step to communicate effectively with your LPs is to understand who they are, what they want, and what they expect from you. Different types of LPs may have different goals, preferences, risk appetites, and investment criteria. For example, institutional investors like pension funds, endowments, and foundations may have longer time horizons, lower return expectations, and stricter due diligence processes than high-net-worth individuals, family offices, or corporate investors. Therefore, you need to tailor your pitch to suit your target audience, and highlight the aspects of your fund that align with their interests and needs.

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Matthew Craig-Greene

Your story, told better...brand, marketing, and IR for private equity and anyone else who needs it
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Find ways to interact with your LPs when you are not pitching anything and try hard to be genuinely helpful to them. As you become a useful resource beyond your commercial relationships, you may find that they respond, in kind, revealing the real influences on their investment decisions, referring you to other LPs and helping you understand what makes them and their peers "tick".

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2 Showcase your track record

One of the most important factors that LPs consider when evaluating a VC fund is the track record of the fund manager and the team. LPs want to see evidence of your past performance, your ability to generate returns, and your expertise in the sectors and markets that you invest in. Therefore, you need to showcase your track record in a clear and compelling way, using relevant metrics, case studies, testimonials, and references. You also need to demonstrate your value-add as a VC, such as how you support your portfolio companies, how you access deal flow, and how you leverage your network and reputation.

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Matthew Craig-Greene

Your story, told better...brand, marketing, and IR for private equity and anyone else who needs it
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Everyone knows this, of course. Whilst any LP would be a fool to enter into a long-term relationship with a VC over track record, alone, it would be just as foolish to enter into such a relationship without a strong track record. Track record is "table stakes" - you need more, but you certainly need it.

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3 Explain your strategy and thesis

Another key factor that LPs look for in a VC fund is the strategy and thesis that guide your investment decisions. LPs want to understand how you identify, evaluate, and select opportunities, how you allocate capital, and how you exit your investments. They also want to know what makes your fund unique, differentiated, and competitive in the market. Therefore, you need to explain your strategy and thesis in a concise and coherent way, using data, trends, and insights to support your arguments. You also need to show how your strategy and thesis fit with the current and future market conditions, and how they create value for your LPs.

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Amit Mehra, CFA

Partner at BORDΞRLΞSS Capital
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LPs seek VC funds with a clear, data-backed investment thesis that aligns with market dynamics and has a competitive edge. Articulating how your fund's strategy leverages emerging trends and technologies can demonstrate foresight and the ability to adapt, which is crucial in the ever-evolving landscape of venture capital. Moreover, showcasing a history of successful exits and value creation can bolster confidence in your fund's potential for future returns.

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Gonzalo Martínez de Azagra
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In many jurisdictions the regulator forces GPs to overtly and specifically disclose risk in the fund brochure and website. Moreover, as GPs it our responsibility to highlight that investing in a VC fund should happen as a complement to a well diversified portfolio of other assets. Moreover, the investment should represent a small percentage of the overall portfolio due to its high risk/high return profile and the variability of outcomes.

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Aviv Harkov

Connects IL founders to Intuit & 100M+ users | Helps founders build & fundraise smarter with actionable insights | All opinions are my own
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If they invested in you, than your LPs know the fund's thesis. A specific deal requires you to dig deeper and explain how this vertical, this technology and this team fits within your thesis. Just like the startup to answer "why now" in their pitch you need to explain to LPs "why now" and "why them." Also, the majority of LPs are not interested in the details of every deal. I'd send the email with the information and offer a call with any LP who is concerned. Don't go chasing them or it will make them wonder why you are overselling this deal...

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4 Address the risks and challenges

While you want to highlight the positive aspects of your fund, you also need to be honest and transparent about the risks and challenges that you face as a VC. LPs are aware that VC investing is inherently risky and uncertain, and they appreciate candor and realism over hype and optimism. Therefore, you need to address the risks and challenges that may affect your fund, such as market volatility, regulatory changes, competition, valuation, liquidity, diversification, and alignment. You also need to show how you mitigate and manage these risks and challenges, using best practices, policies, and contingency plans.

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Amit Mehra, CFA

Partner at BORDΞRLΞSS Capital
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In the VC landscape, transparency is key to building trust with LPs. Acknowledging risks such as market volatility and regulatory changes demonstrates a fund's maturity and preparedness. It's crucial to articulate a clear risk mitigation strategy, which might include diversification of investments across sectors and stages, or a robust due diligence process. This not only reassures LPs but also positions the fund as a thoughtful and strategic player in the market, capable of navigating the complex dynamics of venture investing.

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5 Communicate your vision and impact

Finally, you want to communicate your vision and impact as a VC, and how you contribute to the broader ecosystem and society. LPs are not only interested in financial returns, but also in social and environmental returns, especially in the context of the global challenges and opportunities that we face today. Therefore, you need to communicate your vision and impact as a VC, and how you align with the values, missions, and goals of your LPs. You also need to showcase your impact metrics, such as how you measure and report on the social and environmental outcomes of your investments, and how you adhere to the principles of responsible and sustainable investing.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Michael Sonenshine

Investment Management, Finance | CFA, MBA
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Make sure you have a comprehensive risk disclosure document that presents a wide array of risks. Many of these might seem obvious, but a few will be specific to what you do (i.e. the type of companies you invest in). Make sure in your presentation materials you address not only the risks, but any tools or policies or processes you have to mitigate the risks. This demonstrates to investors not only that there is risk, but that you put serious thought, time and effort into managing and mitigating the risk.

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What are the best ways to communicate risks and rewards of a VC investment to potential limited partners?

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2

3

4

5

6

1 Understand your LPs

2 Showcase your track record

3 Explain your strategy and thesis

4 Address the risks and challenges

5 Communicate your vision and impact

6 Here’s what else to consider

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What are the best ways to communicate risks and rewards of a VC investment to potential limited partners?

1

2

3

4

5

6

1 Understand your LPs

2 Showcase your track record

3 Explain your strategy and thesis

4 Address the risks and challenges

5 Communicate your vision and impact

6 Here’s what else to consider

Venture Capital

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