All In: Re-imagining Our Role As An LP In Venture

By Beezer Clarkson, Managing Director, Sapphire Ventures, and Nino Marakovic, CEO and Managing Director, Sapphire Ventures.

What if limited partners welcomed change as fearlessly as other players in the entrepreneurial community? What if we threw out any of the old norms that could hold an LP back and instead started fresh to create a new (and better) investment vehicle optimized for what venture managers value most? What does it look like to be an LP that’s fully committed to venture?

Four years ago, when we launched our fund investing business, Sapphire Fund Investments, these were the questions we wanted to answer. We set out to understand what makes a great LP and build our business based on that. Since 2012, we’ve invested in multiple funds, closely evaluated scores more and met hundreds of fund managers across four continents. We listened carefully to their perspectives and talked with entrepreneurs and other LPs too to gather insights from all parts of the tech ecosystem. We distilled these insights down to three core principles that guide our work today and influence how we look to continually evolve to best serve our venture fund managers (GPs).

Principle #1: Be a long-term, all-in partner

In venture, we believe persistence is key. The size and permanence of an LP’s investable capital matter…a lot. GPs want to know their LPs will be in business for the long haul and have the money to fund them for multiple fund cycles.

So we’re thrilled to share that Sapphire Fund Investments has a new evergreen structure, supported by hundreds of millions in investible capital including our additional capital commitment announced today. With our new structure and increased scale, we are proud to be poised better than ever to support our GPs for many years and funds to come. And we’ll continue to commit annually to emerging and established VCs in the United States, Europe and Israel.

Along with permanent access to capital, GPs want LPs with the ability to move quickly, efficiently and rationally. This can take multiple forms. For us at Sapphire, we have chosen the form of a dedicated LP team that strives to be thorough, responsive and knowledgeable about both venture as an asset class and technology itself.. We want to understand where our GPs are coming from and the ecosystem in which they operate. We’ve also enhanced our ability to directly co-invest with our GPs in both initial and follow-on rounds. Not only are we there for our GPs as investors in their fund but we can also work with them as they go to market and invest directly in companies.

The other side of the persistence coin is dedication. Dedication to the asset class in good times and bad. We’re ‘all in’ on venture. Meaning, as an LP, we invest exclusively in early-stage venture funds and focus on being experts in technology-driven innovation. No swapping venture for other asset classes when markets go south. All in on venture, all the time.

Principle #2: Deliver helpful perspective and best practices

No one likes a back seat driver. However LPs can also add value beyond capital by sharing what they see. We believe this is one of the key ways LPs can help make both their VC managers and their entrepreneurs successful.

The way we see it, it’s our responsibility to track industry trends and share our findings with our fund managers. We saw how the startup ecosystem as a whole benefited from the increased dialogue between VCs and entrepreneurs with the advent of VC blogging. With greater transparency came deeper understanding about the perspectives of partners at VC firms and more authentic relationships were built on trust. So we followed suit. We started writing our own blogs, sharing industry data and earlier this year launched OpenLP with other forward-thinking LPs to help foster greater understanding and collaboration in the entrepreneur-to-LP tech ecosystem.

We also sit alongside our colleagues on the Sapphire Ventures’ growth team that invests directly in growth-stage technology companies. We think this meaningfully differentiates us as an LP and enhances our ability to provide perspective, advice and a bird’s eye view on the overall tech environment. Since January 2011, our growth team’s portfolio has seen 38 exits, including 15 IPOs and 23 mergers and acquisitions. They’ve been among the top five most active VC investors in U.S.-based tech companies that have completed an IPO.[1] Not a bad set of folks to share an office with.

As a result of our close collaboration, we’re able to share trends and insights gleaned from expansion-stage investing with our early-stage managers and their entrepreneurs. Being part of a GP ourselves in many respects also provides an additional lens to view the world. We believe it gives us a great measure of empathy for our GPs and helps guide us on the right questions to ask and the right metrics to use.

Principle #3: Make business connections that matter

Timing is everything, and when the time is right, LPs should provide additional business value, beyond capital and perspective. We see the value direct investors provide by making key business introductions and believe LPs can be in a position to do the same. We have worked hard to position ourselves to make useful introductions…and we do — to key customers for portfolio companies, to entrepreneurs who have been there and done that, and to relevant operators with whom to collaborate and share ideas.

Because SAP, the global enterprise software company, is our primary source of capital, we’re afforded deep connectivity to its Global 1000 customer base. And we leverage this relationship for the benefit of our GPs and their portfolio companies. We do this systematically through our dedicated market development team, which makes a significant amount of curated introductions as well as hosts numerous events and forums focused on delivering relevant content and connections to decision-makers at large enterprises.

Lastly, LPs know other LPs and what makes them tick. For fund managers, this can mean introductions at the right time and place. At Sapphire, we strive to be an ambassador for our fund managers and their eyes and ears to the LP world.

At the heart of it

We are not quite like other LPs that we know. We have built our platform, born originally from a direct investing activity in association with a global software firm, to be the best LP that we believe we can be for our GPs. However, it can be awkward to describe something new using existing nomenclature. Our evergreen vehicle provides long-term capital, but we are not an endowment, a foundation or a family office. Given SAP is our investor, people sometimes want to call us a “corporate LP” or a “strategic investor.” We are neither. We are an independent firm that invests for financial return and derives significant benefit from our relationship with SAP and our direct growth investing business that we pass on to our fund managers and entrepreneurs.

We don’t get hung up on fitting into old definitions. What we do get hung up on is our desire to be in service to our GPs and entrepreneurs and in so doing set a new bar for what a leading LP can look and act like. We know making great investments and building great companies is not easy. Our goal is to do what we can to help make it that much easier.

We are all in.

[1] http://pitchbook.com/newsletter/the-top-7-vcs-behind-us-tech-ipos