How Limited Partners Can Add Value to Venture Capital Funds

Many VCs have started to build out their portfolio acceleration platforms, which they use to attract more investment opportunities, lower their failure rate, and increase their negotiating leverage. We think Limited Partners can do the same.

Elizabeth Clarkson, Managing Director at Sapphire Ventures, recently wrote a piece in TechCrunch on “Why founders should care where VCs get their money”. In this article, she makes several strong points on how LPs can help VCs be better at what they do, including being a value-added component of the extended network VCs can offer founders.

We wanted to explore this idea further, to help inform the development of Blue Future Partners’ strategy. As an analytical framework, we used the “TOPSCAN” model developed by David Teten, Partner, ff Venture Capital, in his Journal of Private Equity paper, The Lower-Risk Startup: How Venture Capitalists Increase the Odds of Startup Success. David and his coauthors found 7 levers of value creation for VCs to support their companies; we think the same framework can be used for looking at ways that LPs can support their fund investments.

Even the most experienced VC has typically worked at only 1–3 VC funds. An experienced LP has seen the inner workings of hundreds. We think this provides a perspective and data on industry norms that most individual VCs find hard to match.

The TOPSCAN Model for LPs

Lever 1: Team-Building

VC value add

Growing a startup’s human infrastructure: Identify, source, recruit, close, retain and rotate talent

LP value add

Many LPs tend to come from entrepreneurial backgrounds and ways of thinking. Opening this up to VCs can significantly broaden their network into other industries and geographies.

Lever 2: Operations

VC value add

Enhancing admin, accounting, legal, technological capabilities

LP value add

VCs with a platform approach tend to provide tangible value primarily in their home countries. International LPs can particularly help underlying portfolio companies expand operations in new geographies. For example, they can help identify service providers (accountants, legal, etc.) with relevant expertise.

Lever 3: Perspective

VC value add

Strategy, competitive positioning, defining the target market, and scoping product

LP value add

An experienced LP can give frank feedback on a proposed strategy or senior-level hire.

Lever 4: Skill-Building

VC value add

Building the right skills and ensuring they develop with the company’s life cycle: Management, sales, partnerships

LP value add

LPs can work directly with CEOs and founders in their underlying portfolios to provide strategic advice and guidance in areas in with which they may be uniquely familiar with.

Lever 5: Customer Development

VC value add

Identifying the right customers and gaining access to them

LP value add

LPs can offer their typically broad network to identify and introduce potential customers, e.g. to portfolio-companies of other VCs they are invested with, or to distributors and manufacturers in specific industries. Also, LPs can accelerate a company’s learning process, e.g. by sharing insights about specific legal concerns in geographies where the LPs have experience.

Lever 6: Analysis

VC value add

Helping entrepreneurs measure, understand and report the performance

LP value add

With data from hundreds of companies, LPs can help benchmark performance against industry metrics. Valuation is an easy example of a subject about which there can be a wide range of opinions. Scott Kupor, Partner, Andreessen Horowitz, recently observed, “at least half of the conversations we have with our LPs is comparing our unrealized “marks” to those of other venture firms who have the same company in their portfolio.”

Lever 7: Network

VC value add

Providing access to the investor’s typically very large network

LP value add

Tapping the network of dozens or more LPs acts as a multiplier, making the VC’s network very large. Fundraising in particular is very time-consuming for all but a very small number of elite funds, and a value-added LP can ease a fund manager’s job by highlighting LPs with dry powder.


At BFP, we like VC firms who have a platform approach. We believe that we add value to those platforms by building an active relationship between GPs and LPs.



Disclosures:

1. Blue Future Partners advises fund interests in ff Rose Venture Capital Fund, L.P. and ff Sapphire (IV) Venture Capital Fund, L.P.

2. Philipp von dem Knesebeck is a member of the LP Advisory Board of ff Rose Venture Capital Fund, L.P.

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