Chris Wade on Bad LP Behavior & 10 tips to deal with it.
By Chris Wade, founding partner of Isomer Capital.
We all know the story below all too well. It happens to us all and it’s independent of experience or the number of funds raised.
Some people think it’s fun to pretend they have capital, gain your trust and data room information, and waste your team's time.
I have never figured out to what end these characters do this.
It’s happened to everybody rasing capital. During my time, being on both sides of the table, I’ve thought of a few tips that might make us think about this the next time it happens. These tips are not the definitive list; others may want to contribute based on their experience. We welcome you all to do so in the comments 🙏
Writing this, I’m also concious that we at Isomer interact with hundreds of funds every year and are able to commit to only a few. We’ve built Isomer on the principles of being a fair LP to all. Nonetheless, inevitably, some times the human process fails and we do not communicate effectively. Just know that the below is how we want to work with our potential LPs and how we strive to work with every GP we meet.
1. Expect easy come, easy go
It is our observation that LP relationship development takes time (some may argue too long, but then again, these are +10-year partnerships being considered), so when an LP arrives stating they just need a few weeks to review materials etc., then probably the alarm bells should be ringing.
2. Do LP due diligence
Often when we meet a 1st-time manager, we are immediately into the pitch, why the world needs this new fund, and how they have all the right experience/team and proven track record. I always smile when I meet a new manager discussing their 3rd or 4th fund.
But there’s a set of questions that the best managers also get into: "How are you? And how’s Isomer doing? What are you looking for at the moment? Do you have investment capacity?
In other words, they do a lot of DD on us as a prospective LP. Just as a good founder will do DD on a future VC, we need to be more comfortable with the DD on LPs; any unwillingness to answer questions or vague responses should probably be telling.
3. Share LP experiences
LPs are precious and to be preserved in the inner sanctum of your fund's crown jewels. Yes, but. Sharing your experiences one-on-one with the other GP managers is one of the best ways to help our industry highlight the time wasters. For example, during the recent VC funding boom, many new LPs came to market with capital propositions for GPs, failing to mention they have to raise a fund. We have many stories of such behaviour; it is not our MO to be public about this, but if our GPs ask, we will point them in the right direction and encourage others to do the same.
4. Ask for “the order"
We are not good at asking; "Are you going to commit to my fund?"
We find all kinds of proxies for the same question; "Do you need any more information? "Would you like to meet other LPs?", "How are your commitments going this year?" etc., etc .
I recently met a senior potential LP who knows us well and is positively inclined to us and asked the following: "How are you thinking about VC commitments in 2023?"
He looked at me with eyes that said, "What are you asking??"
"Well, what I am asking is: would you consider committing to us this year?"
What followed was a helpful and encouraging answer. Dare to ask.
Help build the knowledge base - add your tips & comments below!
5. Understand where you are in the LP process
In the dance to acquire an LP, there are two definitive stages:
Does this fund fit our investment thesis/strategy/deployment plan?
If yes, when do we want to complete the DD, and if successful, join the fund?
Determining where you are in this process is crucial as it lets you focus your LP wrangling appropriately - no point in discussing close dynamics if the LP is at stage 1!
6. Understand who the decision makers are
Determining who are the decision makers and whether there’s an external IC process is important. LP-ego can somewhat get in the way here; the person you are talking to will want to be considered the most important and so offering to meet a broader team in the LP-organization is a good question and, if denied, is a good clue on where you are in their process.
7. Agree to Investment Process Timescales
When it's clear you are in Stage 2, it's helpful to agree on the definite and frequent steps to the LP being admitted to your fund. Regular steps aim to determine if all is on plan to happen as agreed. As strange as it sounds, LP bad behaviour often occurs at this stage and is annoying as your expectations are high and you’ve maybe been high-fiving over gaining a new LP, and then they disappear!
Being professionally demanding when timing goes off plan seems counterintuitive to the friendly LP wrangling approach, but good LPs will respect it, and you will determine the bad one sooner.
8. Manage your time
When discussing LP decisions, we sometimes say the 2nd best answer is NO because you can stop wasting time on a non-productive LP and move on to someone who might give you capital.
9. Protect your information
Data rooms take a long time to prepare and have a lot of commercially sensitive data that should be protected. While NDAs are an option, all they do is add to a moral obligation rather than anything more helpful to recover your data. A more useful protection is offering access to the data room only when the LP has shown interest and spent time with you and your team, i.e. not as an initial LP engagement tool. Tracking the data room activity once an LP has been given access is another good way to determine LP interest in your fund.
10. Consider the current environment
Finally, to state the annoyingly obvious; we live in challenging times, affecting LP's ability to conclude fund commitments. In this environment, LPs can start with good intentions and then have to stop the investment process. It’s important to state that this LP volatility is not necessarily bad LP behavior if it is communicated in a timely manner.
I hope this gave you some insights you can use in your fundraise and we encourage to add your own tips in the comments below! We all stand on the shoulders of giants, let’s help each other get to the next level.