Venture capital fundraising increased significantly in the third quarter of this yr, reaching only $66.5 billion, down 16% quarter-over-quarter and 15% year-over-year. In this difficult environment, institutional investors are becoming more cautious and reassessing their investment strategies. For some VCsthis highlighted an often neglected approach to fundraising: bringing in entrepreneurs, including the founders of former portfolios, as limited partners.
Here’s why it worked for us.
Why Choose Founders as LP?
Institutional investors will be a reliable source of capital, but they arrive with long implementation cycles and high reporting requirements. On the other hand, tech-enabled LPs make investment decisions faster and offer flexibility in check size. Many of our investors start small – anywhere from $1 million to $2 million – and increase their commitment as they see results, allowing us to make strategic adjustments throughout the fund’s lifecycle.
Some of the entrepreneurs we have as LPs are actually founders of our former portfolio corporations, including CyberX (acquired By Microsoft in 2020). By inviting them to develop into LPs, you are building a partnership of natural trust – based on shared experience and mission. This loyalty and commitment is typical of the LP founder dynamic.
How to build and maintain these partnerships
On Flint’s CapitalWe have all the time positioned ourselves as a “founder-friendly fund” and we have approached this very consciously. When we see something unfair happening, we step in as an arbiter to resolve the situation.
Here’s an example: A significant strategic investor was about to enter one of our portfolio corporations and we agreed to an appraisal. But then they got here to us and offered a premium above the agreed valuation, which meant that we might get more for our shares, and at the same time they wanted to significantly lower the founder’s valuation compared to what we discussed.
They asked us to stay out of their way, and we took a hard line and said, “No, it won’t happen.” We have agreed on a consolidated position on the sale, we have agreed on a valuation and either the transaction can be concluded at this valuation or there can be no transaction. The investor made the decision and finalized the transaction on the originally agreed terms.
Apart from business talks, we spend time together. We play paddle tennis, drink drinks, attend Vipassana meditation retreats, and attend races. Sometimes we go mountain climbing or party at Burning Man.
I have countless stories, but all of them convey the same message – when our founders realize that we are able to support them, they feel the power of authentic partnership.
Creating a culture of cooperation
Entrepreneurial investors bring greater than just capital, additionally they provide networks, knowledge and credibility.
To fully realize these advantages, it is very necessary to keep communication channels open and frequently updated on developments. Not only do they value it, but they may add more help by contributing to your pipeline and referring leads according to your needs. These direct, results-oriented conversations resonate higher than lengthy reports and paperwork.
This creates the virtual advisory board needed to spot trends and adapt strategies. Entrepreneurs-turned-LPs bring deep industry knowledge and easily connect with existing founders, helping them overcome the challenges of scaling. This relationship is difficult to replicate solely in the case of institutional investors.
A model that is not for everyone
Raising funds from entrepreneurs might not be the right alternative for every fund. Institutional LPs remain a cornerstone of many VCs, providing the stability and significant funding that many corporations rely on. However, if you are looking for a more flexible, relationship-based approach, building an LP base with founders could also be a practical and strategic alternative.