Seinfeld's four main characters: Jerry Seinfeld, George Costanza, Elaine Benes, and Cosmo Kramer are renowned for talking about nothing and challenging the norms of society.
You may be surprised to hear how these characters are not so different from the limited partners ("LPs") in a venture fund.
LPs are the lifeblood of venture capital. Without limited partners, we wouldn't have venture funds; without venture funds, we wouldn’t have nearly as much innovation. So, for a VC, pitching and landing LPs is a prerequisite.
The LPs in a venture fund comprise pensions, insurance companies, high-net-worth individuals, sovereign wealth funds, family offices, and university endowments. Understanding the nature of your LPs can determine the success or failure of your fund.
The good news is LPs tend to have common characteristics and goals based on their organizational structure.
Without Jerry, this is no Seinfeld. Jerry’s success as a stand-up comedian allows him to spend his days acting as the voice of reason for his eccentric group of friends. His desire for order and stability most notably defines Jerry. When the reward is a delicious soup, following a “Soup Nazi’s” protocol is more important than sustaining a relationship with his latest fling.
In many ways, Jerry’s risk tolerance and decision-making process are similar to pensions and endowments.
Pension funds, the largest contributors in the venture ecosystem, tend to be risk-averse. Employee and employer contributions fund pensions. So, pension funds aim for a balanced portfolio of liquid and illiquid assets with the goal of generating long-term and stable returns.
Similarly, university endowments manage significant in-flows (e.g., tuition) and out-flows of capital (e.g., faculty salaries), so they take a balanced investment approach. However, endowments have made significant investments in venture. For instance, Yale’s endowment dedicates around 30% of its portfolio to private equity.
Pensions and endowments are not afraid to make large bets on venture. However, like Jerry, their risk allocation is calculated and process-oriented. Endowments and pensions look for fund managers with a consistent track record of generating returns, and may be less likely to be bet an emerging fund manager.
Of course, we can't forget George, a complex and neurotic character constantly struggling to keep his job and girlfriend. Even when living with his parents, George is often focused on the short-term financial consequences of a particular action.
One of George’s most memorable moments is buying cheap, old envelopes for his wedding invitations. Despite Susan’s pleas, George purchases the cheap envelopes, which turn out to be toxic, and Susan dies from licking the envelopes. Above all else, George is focused on short-term liquidity.
Insurance companies are in the business of uncertainty. Insurance companies manage significant inflows (e.g., premiums) and outflows (e.g., claims and underwriting) like pensions. Given the uncertain nature of future claims, insurance companies tend to take a conservative investment approach–often concentrating their portfolios on relatively safe and liquid investments (e.g., bonds, cash, public stocks).
Given the need for liquidity, insurance companies are often reluctant to invest in venture funds–which may be locked up for 10+ years. However, insurance companies and other financial institutions contribute about 20-30% of the capital deployed into private equity. Even when making venture investments, they generally stick with proven managers or later-stage funds.
Sure, insurance companies aren’t exactly pinching pennies when it comes to wedding invitations–but they are the most cognizant of liquidity when it comes to our world of LPs.
I can't forget my favorite character. Elaine holds a steady job as a publishing executive that takes calculated risks and enjoys a "big salad" from time to time. Elaine’s mantra is most apparent when she enters an auction for John F. Kennedy golf clubs with the intention of staying within her boss’s budget, only to let her personal convictions (and a bit of spite) lead her to overpay to beat out Sue Ellen Mischke.
In many ways, Elaine is similar to a family office or sovereign wealth fund ("SWF").
Family offices manage the investments of wealthy families. Family offices often maintain a diversified portfolio with conservative, moderate, and sometimes aggressive investments. However, family offices often look to leverage relationships and make investments based on the convictions of their beneficiaries. They look to venture to provide outsized returns and, generally, do not have cash outflows as significant as insurance companies, pensions, or endowments.
SWFs are state-owned investment funds that manage a country's surplus reserves. SWFs generally have a long-term investment horizon and aim to balance growth and capital preservation. SWFs must balance their desire for growth with political and social economic considerations, which may result in longer decision-making timelines.
Like Elaine, these LPs aren’t afraid to take a risk when unique opportunities present themselves.
Of course, what would be an episode of Seinfeld without Kramer bursting into Jerry's apartment? Kramer is the most impulsive and risk-seeking of the main characters. He constantly pursues new ventures, often with little regard for potential consequences. Kramer exemplifies the risk-taking mindset when he devises a plan to collect bottles in New York and drive across the country to arbitrage Michigan's recycling system.
Kramer’s risk tolerance is comparable to a high-net-worth individual ("HNWI") willing to invest in high-risk, high-reward opportunities like venture capital.
Like family offices, many HNWIs embrace the risks associated with a venture strategy in pursuing outsized returns. They may be more likely to invest in emerging fund managers, or funds focused on earlier stages (e.g., seed funds).
Kramer’s mindset isn’t that different from an HNWI’s approach to investing in a venture capital fund, which involves making large bets on early-stage startups. These investments carry inherent risks, as the success of a startup is uncertain, and most ultimately fail. However, the potential rewards can be significant if the startup becomes successful. Although Kramer is not an HNWI by any stretch, he shares a similar mindset.
Emerging fund managers need to understand the characteristics and goals of prospective LPs. Like Jerry, George, Elaine, and Kramer, each LP has a unique personality. By understanding their risk tolerance, investment strategies, and motivations, a fund manager can tailor their pitch and explain how their thesis and track records further an LPs goals.
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Disclaimer: While I am a lawyer who enjoys operating outside the traditional lawyer and law firm “box,” I am not your lawyer. Nothing in this post should be construed as legal advice, nor does it create an attorney-client relationship. The material published above is only intended for informational, educational, and entertainment purposes. Please seek the advice of counsel, and do not apply any of the generalized material above to your facts or circumstances without speaking to an attorney.