Limited Partner Investing Gains Momentum as Big Fund Activity Slows

Key Takeaways

• Limited partner led funds remain vigilant for the development and innovation of products.

• Emphasis on community has empowered operators with deep domain experience to lean into VC as an LP.

• Qualitative, crowdsourced, community data is becoming increasingly more thorough and effective a predictor.

• Founders find operators sharing the same experience and passion to be a welcomed addition to their team.

The ripple effect partially caused by troubling news from First Republic, Silicon Valley Bank, and Signature Bank nearly 5-months ago is evident as Q2 deals in the U.S. were down 13.1% from Q1 2023 but how do venture investments during an economic downturn perform? Despite the hesitancy displayed by big funds in the current landscape, indications that a surge in LP scouting and investing is apparent…

Additionally, if you look at the top 10 performing funds per vintage year, the majority are new or developing funds. – Michael Cardamone

Limited partner led funds remain vigilant for the development and innovation of products that will enhance the future of AI, FinTech, and BizOps.

The Startup Community Emerging as Informed LPs

Founders, executives, and experienced operators have emerged from the pandemic more resilient and well-connected after being forced into work from home arrangement since 2019. The historic and inherent risk assumed in becoming an LP has reserved venture capital funding for a smaller subset of advanced investors with previous experience but the emphasis on community in recent years has empowered operators with deep domain experience outside of VC to lean into an LP role.

As startups continue to scale effectively while growing more lean, operators are serving an increasingly important and overarching role that is critical to the trajectory of the business’ success. The progression has led to a new-age of operators that excel across strategy, BizOps, Finance, and ultimately scouting and investing, giving them an edge that helps evaluate the potential of products, founders, and teams.

Effectiveness of Limited Partner Investing in Silicon Valley

The traditional approach to auditing financials, interviewing founders, and observing market trends will continue to serve as the general criteria for assessing VC opportunities but qualitative data is becoming increasingly more thorough and effective a predictor when paired with traditional indicators and valuation metrics.

The aforementioned spike in professional communities has developed into groups of operators embedded in the startup community becoming acquainted with emerging products and founders, leading to more comprehensive and personalized assessments. LP’s that’re active in the startup ecosystem, leverage social resources (e.g. Operators Guild), and understand the traditional approach to successful LP investing are emerging as effective partners trusted by founders.

Picture this scenario…

Jane meets with a new acquaintance, John, who mentions he is raising a round for his company. Jane shares she is now an LP at a fund and openly welcomes John to share his pitch deck. The deck shows John and his team are capable of scaling their revenue and product offerings, leading Jane to share the pitch deck with some of the LPs who also happen to know John. Jane learns that although John has a great product and a track record of success he has a history of XYZ, a key set of factors that only came to light due after speaking with her close colleagues and that otherwise would have passed the sniff test (e.g. financials, interviews etc.)

Why Successful Founders are Relying on Startup Veterans

Aside from the promising futures for limited partner investing and LP funds and the opportunity for operators to invest with confidence alongside other operators, founders find partnering with like minded operators sharing the same experience and passion to be a welcomed addition to their team.

FOG has been so incredibly supportive and easy to work with. I was blown away by the incredible exposure, engagement, reach and value-add they provided, particularly the CFOs. We were fortunate enough to have a highly oversubscribed round and had to be very selective with our allocation — I couldn’t be happier that we chose to work with FOG.

Rujul Zaparde. CEO & Co-Founder, Zip

FOG is connected to a broad network and gives you access to a diverse set of operators. They bring great insights and help teams tailor their products for their target audience. If you're looking for more exposure to a community of operators who are open with thoughtful perspectives and feedback, FOG Is the place to be.

Cathy Han. CEO & Co-Founder, Levro

The FOG syndicate is made up of an incredible group of operators who bring a diverse set of experiences across every type of business model possible. They're smart, informed investors and a community of potential customers at the same time - an amazing combination for founders.

Thejo Kote. Founder & CEO, Airbase