Module Description:
Experienced VC allocator/LP Matt Curtolo shares what VCs should know about limited partners (LPs), the types of LPs, and how their decision-making works.
Full Transcript:
- Welcome, everyone, to our Ubiquity University session, LP 102: What VCs need to know about LPs. This is our second part in our three part deep dive on understanding limited partners that power a lot of venture capital. Today, we're lucky to have Matt Curtolo, an experience venture capital allocator with over 20 years of experience at institutions large and small. Most recently at Allocate. Ubiquity Ventures is a precede and seed stage venture capital firm investing in software beyond the screen. That means we back very early stage entrepreneurs who are solving a real world problem by bringing software off the screen and computers and smartphones into the real physical world. Today, we'll dive into what VCs need to know about LPs. And with that, Matt, I'll ask you to take it away.
Awesome. Thanks, Sunil. Happy to do this. As a longtime LP, I get a lot of questions about, you know, what should we know about LPs and how they behave and all those things. So I thought I'd provide a little bit of background and context into that for the VC community. So, you know, I think one of the things that people... We talk about LPs as as a group. But one of the things to know is LPs are unique. And I'm usually very reticent to use the word unique. That means an N of one. But in all cases here, like leaves in the picture here, we're in the northeast today, seeing the leaves on the ground. Every LP is a little bit different, just like every leaf. So keep that in mind and keep that in the back of your head. Listening, learning, making sure you treat every LP as an individual, not just one of a type, is really important. So we'll come back to that in a couple of places. But just to set up the framing, I thought I'd go there. Also the chance to put pretty colors on the screen. So talk about LP types and categories. This can take really two shapes. I like to keep it at the highest level. Think institutional, representing an organization or an institution. That can be a team. That can be through a third-party. That can be through a lot of different things. That can be an insurance company, a public pension fund, a corporate, a sovereign wealth fund. So a state owned entity where the capital benefits, the whole country or state or endowments and foundations, which could be colleges or good works organizations. On the other side, which is a growing part of the investor base within venture capital is private wealth or individual wealth. So there have always been high net worth individuals who have been investing. These are just individuals with enough wealth to be able to invest into these funds. But you also now have family offices, so organizations that are managing personal and individual wealth that are able to do this in, I'd say, a little bit more of an organized construct. And then you have RIAs, registered investment advisors or wealth managers who are effectively a collection of individual wealth into what might look like a vehicle or a structure or a fund that's ultimately gonna invest in some of these types of companies. So with each of those types, there are really different dynamics across how they operate. So I pulled a couple of the ways that they differentiate here. The first one being how do they handle pacing? Pacing, just meaning the rate at which the LP is gonna invest into the market. And we talk about something like an endowment or a foundation or several of these groups have perpetual pools of capital that are meant to go on forever. So what they may have is a long-term target that they're trying to reach. And every year or on a regular period, they're going to look at what is the right amount to commit to an asset class, to a sub-asset class, to a strategy to get them to that target allocation and maintain that over time. So they're gonna continue to get new information, capital flows in and out. So making sure that when you think about it in a perpetual pool, that's something that's really driving towards a long-term target, and on a maintenance plan, at some point as well. You also have things with more of an annual budget. So think an insurance company, think a pension fund where there are actual liabilities attached to the business model. In that case, there are either actuarial studies or pension studies where you can see what is the potential outlay that we're gonna have to either pension years or for the benefits out of the insurance company. In that case, you're really driving towards a number to match against that. It doesn't necessarily have to be in a year, but it's often measured on an annual basis. And then you may have... This happens more on the individual and private wealth side, but more of an idiosyncratic or opportunistic investments pacing strategy. So there isn't necessarily a long-term goal or target. It's much more about the opportunity set that presents itself. So one year may be very high in terms of how they're investing and how much capital they're deploying. And on the flip side, there may be another year where the opportunity set has dried up. They didn't find anything that was there. So generally more episodic and lumpy, but all three of these can transcend all of the different types of groups. I gave a couple examples, but that's not limited to or exclusive to those LP types. The investment process is another place where I think there is a lot of difference. I like this graphic because it's kind of... I think it's labeled a messy process. So you just have different groups and how they manage their investment process. It could be very simple, pick up the phone, talk to the principal, they can make a decision on the other side, and that's done. That I would say is at the furthest end of informal. But then you have some of these more regulated institutional clients or institutional LPs where the process is gonna be multiple meetings, very structured. Oftentimes, a structured approval process where we'll talk about in a minute where there might be a board or there may be many layers where that investment has to be approved to ultimately make a financial commitment to the fund and anything in between as well. So both of those represent kind of the two ends of the spectrum, but all of these different institutions can either have, you know, more or less information that they need to receive from the GP. That's the biggest thing here is the information request. So as a VC, one of the pieces of advice is indexed towards the most formal, the largest amount of information necessary. It will be a lot of work. Those oftentimes are attached to either third-party consultants, so groups that may work on behalf of some of these institutions or groups that represent large pools of capital. So if you're doing the work there, that can ultimately flow through and you'll have those details to be able to provide to all investors across the chain.
Something that I was personally very frustrated with when I was raising my first fund was the level of diligence that an LP will perform. It's a lot of information asked for a lot of deep dives, a lot of extra work. And now with a few years of hindsight, a little more perspective, I can see that as a VC, I'm used to a certain amount of diligence and making a decision, but part of that is that I get to make another decision in 12 to 18 months about the follow on check. Another decision every month when I'm sitting on the board. Like, there's all sorts of engagement involvement in many decisions over time. I now realize that with an LP committing to a fund, all of those years of homework are consolidated upfront. And so as a VC, while it can feel like a lot, it's actually they're front loading all of that. And then once they make the decision, they don't make any more decisions. They sort of wire capital as it's called. The next time they haven't make a chance to make a decision might be in three years for the next fund. So it's really compressing a lot of many years of work. And for a VC, thinking about my own day job, it doesn't make a lot of sense, but it makes more sense when you think about it with that framework.
It's a great parallels, you know, 'cause I do think that's... Those who are doing a lot of work front are doing that with the intent of having their next decision hopefully be compounded. And as that time passes, they'll continue to get new information to hopefully support that. Hopefully, they don't have to go and start from scratch again. So that will be good.
Yeah.
And lastly, just to touch on the decision making. In many of these LP types, there may be an independent decision maker. Let's assume that's a family office or an individual. They're gonna make that call on should we invest or should I invest or should I not? With an institution, there may be an investment committee, there may be a formal board, there may be subcommittees, there may be a third-party consultant that's gonna have to approve a deal before it gets to the ultimate... The end board for an endowment or something to that degree. So think about decision making that also just plays into how do you organize your time as a VC going through a fundraise. 'Cause all of these are gonna have an impact on not only your own timeline to go from launch to close, but also all the things in between that may need to happen so you can better understand where those dollars might come from. I think the other thing that we can talk about here is optimizing the engagement, right? So Sunil, to your point, LPs will often make that decision. There's not a lot they can do in the interim period. So what I would suggest is during that time period, LPs are busy, they have a lot of investments across a lot of different strategies. But what you wanna do as a VC, as an investor and a GP, provide us enough information to keep people informed but don't feel like you're inundating people with too much. So some of the tricks I would propose, there's quarterly reporting, right? The financial statements, the numbers, those are pretty standard. But most VCs will write a quarterly letter, whether that's an update on the portfolio, an update on the market, make those engaging, make those pieces something that I'm anxious to get on a quarterly basis because you're providing some unique or distinct insight. So spending the time on putting your particular point of view into those documents increases the engagement. It also will alleviate some of the pressure for people to pick up the phone and say, "What's going on?" So it allows you to be transparent to deliver your point of view. With in a one to many context, your LPs are gonna be happy to receive this as part of their quarterly package. The annual meetings, that is a once a year gathering, a showcase for the manager to highlight a strategy, to bring forward some of the founders and entrepreneurs and portfolio companies and highlight them, give the LPs an opportunity to hear from them and also get together as a large group. Making those as interesting and as thoughtful as possible, I think goes a long way. LPs to the point will go to a lot of these meetings to get information, but there's a bigger part of ecosystem and community building that goes into this. Sunil, I know you've done a lot of the events surrounding an annual meeting where people really get to build relationships rather than just transactionally hear about what's happening in the portfolio. The other two pieces, I'd say, the in-person visits in a world that's becoming increasingly virtual. Whenever you're... I know a lot of GPs that will do a little bit of a tour and visit their LPs in their offices always having an open door policy for when LPs are in town. Have an opportunity to talk to them off cycle. Ideally, when you're not raising a fund will again build that relationship, which will then go a long way in terms of thinking about this in a longer term context rather than shorter term. The last piece here, building a relationship across the LP organization. Think about the individual versus the organization. Ultimately, the organization is gonna be the group on your LP roster, but the individuals, the team around that, given that these are 10 or 12 or 15 year funds may move different seats. So having a depth of relationship within each LP organization gives you multiple opportunities as those folks move on new roles. For warm introductions, the groups that already know you as you think about the next piece. Wrapping up, this idea of partnership, LP, GP, VC, you know, we use a lot of words, but the partnership idea is really this idea of symbiosis, right? The GP's not just or shouldn't be thinking about the LP as just a source of capital. The same way the LP shouldn't think of the GP as just the person who's gonna deliver me good returns. This idea of mutualism of where both parties are really getting benefits, information sharing critical there on both sides. As an LP, I'm seeing what many other investors, many other GPs are doing. I can flow best practices back to my GP. Similarly, they're seeing a lot more companies than they're making investments in. So it can make me smarter from a market and from an intel perspective as well. The idea of referrals, idea generation. We all swim in kind of the same ponds but we can see very different parts of the market. Being able to share those opportunities, be aware of certain things, again goes a long way. And then the opportunity to provide co-investments, right? That can benefit the GP just as much as the LP in terms of being able to understand how those processes work. Providing capital in a place where you can have folks get, you know, more exposure to a company. You can retain ball control as the VC and the LPs getting incremental exposure to something that they find very attractive, you know, across that spectrum. It's all about the relationship building. All of these are understanding back to the first point of every LP is unique. Not all LPs are gonna wanna engage the same way. Not all LPs are gonna think about partnership in the same way. Figure out who makes the best partnership, how you can work with folks and meet them where they are. And I think that will be a lasting relationship between the VC and the LP.
Perfect. Well, Matt, I appreciate you taking the time to take us through this. I think this is a really important relationship, the GP, LP relationship, and sharing more about techniques and mindset will hopefully allow these two groups to get together and be more productive, be more transparent, but understand reach is coming from. This has been our Ubiquity University session, our LP deep dive into what VCs need to know about LPs. Ubiquity University is put on by Ubiquity Ventures. We'd love to hear from you if you'd like to set up a pitch meeting, especially if you have something to do with software be on the screen. You can do that at pitch.ubiquity.vc and you can reach me, it's sunil@ubiquity.vc. Thank you again, Matt.
Thanks a lot, Sunil.