How We Access Top Deals + Pick Winners (Helene Add)

A Limited Partner (LP) is a financial backer of the fund, providing the capital that is invested into startups. LPs must be accredited investors but can be anyone from a high net-worth individual to a pension fund to a larger endowment. LPs have little to no involvement in the day-to-day fund operations

A General Partner (GP) is the day-to-day manager of the fund; they set the investment thesis outlining the type of companies they plan to invest in and are responsible for sourcing and making investments. Their end goal is to provide above-average returns to the LPs. GPs are also responsible for providing regular updates to LPs on the portfolio.

Typical funds return capital through a carry structure with carry generally set at 20%. With a carry structure, all exit proceeds are returned to LPs until their principal capital is paid back. After repayment, LPs receive 80% of additional exit proceeds, with the other 20% going to GPs and other employees at the fund.

An investment period is typically the first 3-5 years of the investment term. This is the active portion where the fund is making new investments. Most funds typically make 20-40 investments during this period.

An investment term (or fund term) is the entire life of a fund. Typically, the investment term is 10 years, with the first few years representing the investment period and the remainder for portfolio management. During the passive portfolio management period, funds won’t make new investments but might use the remainder of their capital for follow-on investments in existing portfolio companies. At the end of an investment term, unless it is extended, the fund will be dissolved and the remaining investments will be liquidated with funds returned per the carry structure.

A management fee is an annual fee that covers GP salaries, salaries of other employees in the fund, and other organizational expenses like conference travel, legal & accounting fees, office space, etc. It generally ranges from 2-2.5% annually and is based on the total amount of committed capital for the fund, and typically lasts across the investment term. As an LP in a fund, the management fee is typically pulled from your net investment.

There are some major benefits to investing in a fund vs investing directly into a single early-stage company; the overarching reason is that it increases the chance of success for the investor. This is achieved through a fund’s ability to diversify how one investor’s capital is spent by using it to invest in a portfolio of 20-40 companies instead of just one. Based on the Power Law, which suggests that 80% of a fund’s returns come from 20% of its investments, a fund helps investors increase their chances of finding super-performing early-stage companies that have the biggest potential for upside. The investor is also able to save time by investing in a fund as opposed to conducting their own due diligence on a single company and can take advantage of the increased deal flow a fund sees.

Here are a few typical documents that LPs will need to sign:

• Limited Partnership Agreement (LPA) is a contract between the LPs and the fund which details the authority of the GP, the rights of the LP, the risk for the LPs and GPs, the investment term of the fund, and how returns will be distributed.

• Private Placement Memorandum (PPM) is a summary document that describes the investment opportunity and the risks associated with the opportunity. In venture, these documents might include details of the fund and its executive team, a description of the offering, regulatory disclosures, tax information, and a summary of any material agreements (like the LPA).

• Subscription Agreement is essentially an investor’s application to join a limited partnership, detailing the relationship between the fund and the investor.