Questions LPs Ask Fund Managers

A few years ago, my teammate Elizabeth Yin created a document with questions early-stage VCs ask startup founders during a pitch meeting.

This got me thinking. What questions do LPs ask to emerging fund managers during a pitch meeting?

What metrics or concepts do LPs use to determine whether or not they're going to invest?

Thankfully I have a secret weapon I turn to whenever I have a "dumb" question about fundraising: Eric Bahn, GP at Hustle Fund. Here's what I learned. 

LPs wanna know about...

1) dealflow

2) differentiation

3) founder support 

Let's dive in.


LPs wanna know about dealflow

This feels like an obvious one, but stay with me... there are nuances, people.

Most people who decide to start a fund have some sort of access to dealflow before they start to fundraise. For many, these deals come through their friends or colleagues.

But here's the thing. Most LPs are open to investing in a fund multiple times. They want to find a VC firm that inspires them to invest in Fund I, Fund II, Fund III, etc.

So it's not enough to say "I have friends who are starting companies" because that source will likely only give you dealflow for a year or two. And once it runs out, you'll need to figure out where future deals will come from.

This is why LPs ask about dealflow during a pitch. They want to see that you're confident that you can build an ongoing dealflow pipeline. That you won't burn through LP money trying to figure it out.

Think of it like a startup – as investors, we want to see that founders have some sense of how they'll acquire customers. Word-of-mouth ain't gonna cut it.

There is a big problem, though. There are strict regulations around what you can and can't say about your fund while you are actively fundraising.

This means it will be hard to attract dealflow while you are raising because you can't publicly announce that you're raising a fund.

You need dealflow to attract LPs. But you need LPs to invest in startups.

See the problem? Chicken... meet egg.

Eric has two suggestions for emerging fund managers who are running into this issue:

1. Get a great lawyer to understand the boundaries of what you can and cannot do.

2. Close your round as quickly as possible. Then start deploying those funds. Even if your first round only ends up being a few million dollars, this will allow you to start refining your thesis, proving your model, get more dealflow, and start raising Fund II.


LPs wanna know what makes you different

Time for a hard truth: it's rare to find a truly differentiated fund.

In fact, most LPs I know have said "they all sound the same" when talking about emerging fund opportunities.

There is a reason LPs are so concerned with differentiation. It's because there are way more funds today than there were a few years ago. And LPs want to know: why will your fund be more successful at winning allocation than other funds out there?

Ultimately LPs are investors. They want to see a return.

To figure out your differentiation method, consider filling in the following blanks:

"I think I get allocation into great companies because X. I believe I can serve founders better because Y. I think we can return more money to our LPs because Z."

These aren't easy blanks to fill in. Especially when you're building your fund from scratch, and haven't tested your model or thesis yet.

One way to differentiate yourself is through angel investing. If you have a strong portfolio through your personal investments, you may be able to leverage those wins as you raise your fund.


LPs wanna know about founder support

As we all (probably) know, being an early-stage investor often means we get a large ownership percentage of the companies we invest in.

But as those companies raise subsequent rounds, our ownership gets diluted down. Unless we write follow-on checks.

LPs will want to know how you're thinking about your follow-on strategy. And this relates directly to your founder support.

Most founders will give pro-rata rights and allocation into future rounds to investors they are close with. With investors they have strong relationships with. With investors that support them with advice, operational help, and introductions.

In pitch meetings with prospective LPs, be prepared to talk about your follow-on strategy... not just as it relates to your check sizes and valuation caps, but also in terms of how you will maintain your ownership in companies that seem destined for greatness.