When is Institutional Capital Right for a New VC Firm? And Two Myths About The Downsides of Taking LP Money.
“My first three ventures funds were all high net worth individuals and founders/tech folks. How should I decide if institutional LPs are right for my next fund?”
This was a question put to me earlier this week from someone I’d met via Screendoor, the fund of funds we cofounded to back new firms (sometimes called ‘emerging managers’ in the industry). Of note, and to the credit of this investor, it wasn’t the typical ‘what do I need to prove/show to raise from LPs’ but rather, is this class of financial partner right for me or not?
Before answering I reformatted it to “Even if I could raise the amount of capital for the next fund from my current individual investors, or write the check myself, what conditions or benefits would cause me to consider institutional LPs of any sort [FOs, FoFs, endowments, and so on]?”
Three Reasons to ‘Transition’ to Institutional LPs
A. You Are Building a Firm, Not Just Raising a Fund (AND Know You Want to Raise at Least 2–3 More Funds After this One)
Institutional LPs are most likely signing up for longer relationships with you than any one individual LP and are able to scale with potential increases in fund size. Once you are confident — in trajectory, in strategy, in joy — that venture will be your career ongoing, it’s worth it to consolidate your capital base in this manner.
B. You Want to Take on Performance Risk Instead of Fundraising Risk
Related to the above, the tradeoff in having partners who are there to support you ongoing so long as you do your job is, well, you have to do your job. HNWs, individuals, CVCs, other VCs, etc all might invest in your fund for reasons besides absolute returns; institutional LPs shouldn’t (although even some of them have adjacent motivations such as secondary/direct investment access). Basically if you are the type of person who ultimately wants to be judged by results (and live with standard VC fund LPAs), then being in business with professional institutional LPs — especially those with evergreen pools of capital — essentially takes your fundraising risk down to zero.
C. You Are Willing to Spend the Time to Find Neutral to Positive LPs, Including Passing Up on LPs Who Aren’t a Good Fit for You
Like any group, ‘Institutional LPs’ aren’t homogenous. Based upon their institutional needs, their organizational culture, their familiarity with venture, their personalities and team construction, etc you will find folks who are more or less suited to how you want to run your business. Even in our first Homebrew fund, we focused very much on ‘mutual fit’ and turned down some opportunities to work with LPs where it didn’t feel right.
And Two Reasons to Avoid Institutional LPs That I Think Are Overblown
A. If You Take Institutional Capital They Become Your Customer and Managing Them is a Ton of Headaches
I find this to be a sign of poor LP selection by the GP or inability to run their business well. There’s nothing about the relationship with high quality, evergreen, professional, VC-savvy LPs that adds overhead disproportionate to the value they can bring (sole caveat would be it is kind of annoying when the people in the seats at an LP change — and they do change more than you would expect). LPs are our partners, founders are our customers. That’s always been clear to us and our LPs.
Most of the other overhead questions come into play when you take outside capital versus your own, not who that capital is from. Fund structures have their own encumbrances.
B. Taking on Institutional LPs Reduces Your Flexibility as an Investor
This is the old “they are going to hold me accountable to what I put in the slide deck/portfolio model” complaint. In my experience the only true constraint is what’s in our LPA around vice clauses, etc and even those just require approval (for example, in our historic LP-backed funds we couldn’t invest in cannabis businesses that touch the plants themselves since it’s not Federally legal). These were all nothing burgers for us — our LPAC has given great feedback/approved everything we’ve asked about.
When an LP backs you they are doing so because of a strategy you presented within a specific asset class they want exposure to. I can imagine that if you deviated from that wholesale without communication it would lead to mistrust. But the idea that you have to march down a specific path because of a four year old spreadsheet just isn’t true. Our LPs have always said that what they’re outsourcing to us is judgment — we should focus on being great investors and they expect us to adjust to the market, take appropriate risks, earn the opportunity (with founders, co-investors) to find some ‘off model’ investments. If you followed your strategy 100% you were probably too rigid. If you followed your strategy 0% then you didn’t have a strategy.
If you are raising and want to investigate bringing on institutional partners -> Screendoor!
Originally published at https://hunterwalk.com on September 23, 2025.
