Work with your LPAC, not for your LPAC

At Screendoor, because we invest as anchor capital in the earliest funds of managers as they build enduring firms, we’re often asked about LPACs. What does that even stand for? Should I have one?  What should the make up be? How are they used? I thought it may be useful to distill common questions we hear from GPs for all to benefit from. 

Let’s break it down. LPAC - this is your Limited Partner Advisory Committee, a group of LPs who provide oversight and guidance on behalf of the LP base. Your LPAC should be there to support you as a GP and your fund’s best interests. It will be made up of members of the LP base of your fund, and it can differ from fund to fund. You should aim to include representation from all of your LP constituent groups. I’ve seen the member count range from 1 to 7, but my recommendation is to stay in the 3 to 5 range. There are many opinions on keeping to an odd vs an even number of members, but I believe there’s more to it than that.

“But do I need an LPAC already?” Yes!! Not forming an LPAC misses an insane opportunity. They are not simply there for governance voting matters or end-of-life fund management approvals. While it’s generally required in your LPA if you have an institutional LP base, LPACs can help you strengthen ties with your investors and create a feeling of input and mutual responsibility, especially if you are doing something non-standard. This helps with establishing trust and building reputation, and they can grow to be your advocates and long-term supporters beyond just dollars. 

When used effectively, having a strong LPAC can expand your perspectives during important strategic decisions and help you see around corners. It can empower you as the fund manager to make more informed decisions on both short-term and long-term issues. (Or importantly - seemingly short-term decisions that actually have unanticipated long-term implications!)

“Ok, fine, so I’ll just pick my largest LPs.” Not exactly. I’ve seen this method before - it can work, and even if you follow some of the suggestions below, you may still end up here. But I’d encourage you to look beyond the numbers and consider each LP’s alignment, along with where you also fit into their overall portfolio. LPs at the same check size all might feel the same to you on the surface as a GP, but in almost every case they represent VERY different LP profiles. A $3 million commitment within an active venture portfolio vs a $3 million commitment from a massive-AUM branded LP vs a $3 million commitment from an LP just starting to invest in VC for the first time are all very different. They can all be excellent LPs. But the percentage of their portfolio that your fund represents is also widely different. They likely have very different asset allocation strategies, and they could be looking to invest in your fund with a variety of goals in mind.

Every single fund has nuance, and spoiler alert: yours will be no exception to this. Rather than only playing a numbers game, I recommend considering the below characteristics across your ultimate LPAC mix: 

VC Experience - Someone who has seen as much as possible in VC, especially where your strategy is focused, can be a huge asset. LPACs can be incredibly helpful in navigating situations where the details matter - the more they’ve seen, the more they have to draw from in advising you. 

‍Strength of Network and Connectivity - Self-explanatory! Again, because this LP will be aware of your nuance and the things on your mind more than an average LP, they’re more likely to be proactive and make connections you don’t even know you need, before you need them.

‍Team Stability - this is most important to think about as a balance across your LPAC - you don’t want all individuals to be in a position where there’s a 50%+ chance they take a role somewhere else in the next 2-3 years. Then someone new is added to the mix who may not be your sponsor and frankly may not be as aligned. This is also why it’s important to ensure you have touch points and are building relationships with multiple team members, instead of just relying on a single individual.

‍Personal Rapport and Responsiveness - Venture capital is a business centered on people. It’s important that in your most delicate of situations, you have trusted relationships you can reach out to who will shoot you straight (even if it’s hard feedback to hear!). While responsiveness seems like it naturally comes with the governance obligation, you don’t want things held up simply because of time, whether simple voting items or time-sensitive situations where you’re seeking input. 

While some of the more dicey stuff does have LPAC voting that revolves around it, if the above is true, you’ll find yourself with partners around the table who are well-equipped to help you navigate through the rollercoaster ride of managing a VC fund.

I’ll break down common ways we see LPAC engagement and how you can maximize your use of them in a future post.

If you’re an emerging manager actively fundraising, and would like to share more information with us, we have an open application process and would be honored to hear from you. And if you’re an LP who would like to learn more about the emerging manager ecosystem, we welcome you to reach out to us!