Thoughts of an LP Advocate

By ffVC Director of Investor Relations, Katherine Bluhm

Here at ffVC, we are frequently asked what the “ff” stands for in our name. While being “founder friendly” is so core to everything we do that we chose to base our name on these letters, being “LP friendly” is the only thing we value even more. (Unfortunately, “lpffVC” doesn’t roll off the tongue quite as nicely).

How we define what it means to be “LP friendly” in today’s market goes beyond formalistic legal and economic terms, but rather it is a mindset that drives and informs everything we do across the firm. We love waking up every day to work with founders and to help build amazing companies, but behind all of this is a duty to the limited partners, both family offices and institutions, which have placed their long-term faith, trust, and hard-earned capital with us. These are our partners and we must consider how best to develop and manage our mutual relationship.

So, to us, our “LP friendly” philosophy includes very specific promises and processes.

An Alignment of Economics, Practice and Culture

We work with one of the nation’s best law firms to make sure the terms of our funds are distinguished among our peers, ensuring they will benefit the firm and our limited partners in ways that will ultimately improve returns to investors. We focus on developing a complete alignment of incentives between our investors, our portfolio companies, our partners and team members by such terms as:

• Our agreement to never extend management fees beyond the original fund term, e.g., 10 years, not 11 or 12 or more.
• Our agreement to offer co-investment opportunities to suitable investors on a strictly no-fee and no-carry basis.
• A compensation structure for non-partner employees that provides carry interest-related profits for 100% of the employees, so all employees of the firm, regardless of level or tenure, receive material compensation from fund performance and, therefore, they have “skin in the game.”
• An open book management practice so limited partners have an opportunity to understand how management fees are used to operate the management company, compensate partners, and maintain strong incentives to maximize the return on their investment.

Deal Review and Sharing; Access to our Brain Trust

We serve as a resource partner to our limited partners and provide a variety of additional services dedicated to their specific needs, such as (i) reports and updates on specific technologies, (ii) technology- and investor-specific brainstorming meetings and “demo/meet the ceo” days, and (iii) limited-invitation dinners of experts on curated topics.

For many of our limited partners who have strong interest in making direct investments but understandably have limited due diligence resources or experience, we provide a quick, but detailed written analysis of their potential investment opportunity. We often learn that we benefit from having a wider view of deal flow in the marketplace.

Protect and Generate Returns via Portfolio Risk Reduction

With an unusually robust professional staff of 25+ full-time, in-house employees, we are able to add value, i.e., generate “alpha”, and stay attuned to the developments of each of our portfolio companies. Beyond board seats and observer rights, this “acceleration team” and matrix-style approach provides two advantages:

• Improving Outcomes: Our comparably large team allows us the extra bandwidth to allocate more attention and time to our companies, especially at the most critical junctures of their development, thereby materially enhancing returns over the long run; and
• Optimized Capital Allocation: This comprehensive level of knowledge and interaction provides us the information on internal dynamics at the deepest level within the company’s operations, which, in turn, provides us with an unique advantage in making more intelligent capital allocation decisions at each stage of follow-on investing, i.e., whether or not to participate and, if so, how much?

In today’s ever-evolving venture capital industry, there are a record number of funds in the market, along with new investment structures and platforms that increasingly compete for LP attention and capital. We are continually striving to be the best partner we can for our investors and we welcome your ideas and feedback.

A version of this post also appears in Venture Capital Journal / PE HUB.