Yesterday, I had a typical day for a seed-stage venture capitalist. 6 calls with our incubator company CEOs, 1 call with an investment that we are trying to get over the goal line, and 2 calls with corporate venture capitalists. Then a myriad of meetings with my team to help troubleshoot anything that came up during the day. Oh, and then an evening of responding to Limited Partners who are interested in our latest fund.
There’s a misconception that being in business for yourself means you don’t have a boss. The reality is that there’s almost always a “boss” of sorts. In my case, it is my Limited Partners. My job is to deliver fantastic returns for my LPs. Period. This requires attracting pipeline, developing the pipeline, investing in the pipeline, and creating liquidity in the pipeline. I also have a great team behind me. They augment my capabilities and those of our portfolio companies.
In most cases, a venture firm is a reflection of its LPs. You can get a good sense of a venture capital firm’s LP base if you see how the General Partners (those of us who operate the fund day to day) and the staff spend their time. I have stopped most public speaking unless it attracts deal flow, helps our portfolio companies attract customers/employees, or helps me increase our LP base. I write for knowledge transfer to my team, our LPs, and our portfolio companies. Besides the above work effort, I spend time on investor relations. This means talking to LPs, both new and existing. My team does a stellar job of attracting new LPs. We have a great story and track record, so although it’s hard work there is always a lot of interest.
A good mutual fit between a venture firm and its LPs is essential for success. And since my job becomes a reflection of my LPs, it’s important to me on a personal level as well. So, what makes a good LP for me?
Experience: Investors who have experience investing in pre-revenue companies understand how hard our job is and have a great appreciation for the wins and the losses. It is hard to describe to investors who haven’t experienced it first hand. We have a great success rate, but it isn’t because we are good “pickers.” It’s because we are hard workers. We make good picks because we have a solid system, a thorough diligence process, and a strategic liquidity process.
Asset Allocation: A great investor views us as just one part of their overall investment strategy. They have plenty of other investments, and we fit in nicely with the rest. It is our job to help them determine risk profiles and sizing against their asset allocation strategy.
Culture: A fund life is typically 10 years. These are people we will be spending the next 10 years engaging with on a monthly basis. It is a relationship and not just a transaction. Our funds are small (less than $50m). That allows us to have some selectivity around investors that we don’t want to spend 10 years talking to.
Intellectual Curiosity: When I was trying to decide if VC was for me, an old Silicon Valley venture capitalist gave me some advice: “You don’t see a lot of venture capitalists that own sports teams. If you are getting into this for the money, then don’t. Go start another company instead.” He said that I should do it because I love technology and I love learning. The money isn’t terrible, but that’s not the point. We are nerds. We love technology, and we love when our LPs get excited about technology. Our LPs have an inner nerd waiting to get out.
Mutual Trust: Trust is created in thin layers over time and taken away in chunks. We share a lot of proprietary information with our LPs. Some of this information may inform how they make other investments outside of our fund. Our LPs also share a lot of information with us. We expect for this information to stay within our community. Mutual trust takes time to build, but once you have it it’s magic.
The Long Game: Last year, I visited Singapore. One of my Singaporean LPs asked me to lay out my 20-year plan. My teenage son happened to be traveling with me, and they asked if he was part of my succession plan. It was a fascinating question. It really shifted my thinking to building a firm versus building a fund. It has critically informed my decisions on how we are building and developing our team. We have a culture, and we have a system. We don’t hire people with previous VC experience; we hire people with operational experience and diverse backgrounds. We are building a firm from the ground up. It takes time and a lot of foundational work. Our LPs are in it not just for the fund but for the firm.
Now you know what I look for in an LP. But as I said, this should be a mutual fit, so let’s look at the other side.
How does a potential LP know if Shadow is the right VC firm for them?
Well, if you want a firm that’s tech-focused: we are one of the few firms of our size with a full time CTO. If you want a firm that actively helps your investment succeed: we give our startups every unfair advantage. If you want to help drive meaningful change: we only invest in companies solving deep, validated technical problems. If you want scope: our focus on the built environment means we’re dealing with the largest asset class in the US. And if you want experience: we’ve got that in spades.
If this resonates with you, we should chat.