The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, 2nd Edition

CHAPTER 4 The Universe of Limited Partners

“My life is very monotonous,” the fox said. “I hunt chickens: men hunt me. All the chickens are just alike, and all the men are just alike. And, in consequence, I am a little bored.”

—Antoine de Saint-Exupéry, The Little Prince

Venture capitalists (VCs) hunt institutional investors (called limited partners, or LPs), and entrepreneurs hunt VCs. If VCs understand the universe of LPs and the constraints and drivers of various LPs, the fund-raising process may become less boring for the hunter and the hunted. Potential investors in venture funds, or LPs, include institutional investors (e.g., pension funds, foundations, endowments, banks, and insurance companies) and family offices, including high-net-worth individuals (HNWIs). As seen in Figure 4.1, typically, the bulk of capital for venture funds comes from pension funds. While considering an investment in a venture capital fund, each LP assesses the opportunity based upon the following:

• Asset allocation strategy: A set of investment principles and portfolio construction guidelines designed to generate an overall target rate of return for the LPs. Venture capital is treated as a subasset class of private equity that falls under alternative assets.
• Investment criteria: The factors that help LPs choose target investments within each of the asset classes.
• Investment process: Timelines and steps each LP needs to follow to make an investment decision within each asset class.

FIGURE ...