Questions to Ask Before Becoming an LP

There are multiple factors to consider when becoming an LP.  Want to know the top questions to ask both yourself and the fund manager? Keep reading!

LP stands for Limited Partner. They are the institutional or individual investors that have invested capital in the funds of a venture capital (VC) firm. They have purchased shares in the fund as an investment but are not involved in the fund’s day-to-day business. They have little to no control over the management of the fund, but their liability is limited to their personal investment.

People typically become LPs because there is potential for great financial upside with passive involvement. When deciding whether or not to invest as an LP, here are some of the most important questions you should ask.

Ask yourself:

1. Are you ok with this cash being illiquid?

When you invest in a venture capital fund, once you put money in, you can’t take that money back out.  Compare that to the stock market, aka the public markets, where you can move your money more freely.  Before investing in a fund, you want to make sure you’re comfortable with letting go of that money for a longer period of time.

2. Are you comfortable with this return timeline? 

Typically a venture capital fund sees returns in 7-10 years.  

3. Does the investment thesis make sense to you? 

Even if you’re not an expert in the space or investing, you should still want to get an understanding of how the fund invests and make sure it aligns with your personal understanding. 

4. Do you trust the fund manager?

You’re giving this person your hard-earned money.  It doesn’t mean that you need to invite them to your niece’s birthday party, but it’s worth at least having a conversation!

5. Are you comfortable with the risk?

Before you make any big financial decision, you should always consider all the factors.

It is also important to know what questions to ask the fund manager:

1. What is your investment strategy?

2. How do you source your deals?

3. How frequently will I be updated on fund performance?

4. What are the expectations from me as an LP?

5. What are the historical returns? (if there are any)

6. What’s the timeline I can expect for returns?

7. When are the capital calls? (When you owe your financial commitment)

Ready to learn more about becoming an LP at Jumpstart Foundry? Click here to contact us today.

-Haley Zapolski, JSF Managing Director