📶 34 ways an LP evaluates a GP

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I’ve looked at hundreds of funds over the past four years both as an LP and as an outside advisor through Confluence.

I’ve learned that evaluating funds is much more an art than a science, and I’m obsessing over mental models used to evaluate investment funds (related).

Here are 34 questions I ask myself before and after meeting any new GP.

FRAMEWORKS

What is their edge? How are they different from every other manager you have looked at?

Is this person / team good enough that we want them to be an extension of our team? If the answer is “no”, don’t invest.

Is this person likable? The earlier you invest, the more you rely on collaboration. So being unlikable and early-stage investing do not go hand-in-hand.

Do they have a history of co-investing with LPs? Or do they keep LPs in the dark about who their breakout companies are?

What is their portfolio construction? More concentration = higher risk / reward.

Does their portfolio construction make sense for their strategy? Pre-seed investors should not have a concentrated portfolio. You’re better off maximizing shots on goal instead of fighting for more ownership.

How do they think about follow-on strategy? Do they want to maximize shots on goal, or do they prioritize owning more equity in their winners?

At what stage will they stop investing in pro rata? When do they price themselves out? Have they demonstrated this pricing discipline in the past?

Are they investing in sectors, stages, and geographies where they have tangible advantages over other investors? Or are they investing in hype cycles and competing against the rest of the market?

What unique sourcing advantages do they have over other GPs? How do they see the best founders before others? Do deals come to them, or do they chase after them?

How do they typically communicate portfolio updates and pipeline with their LPs? Are they an open book, or do you have to constantly ping them to get updates on how your money is being allocated?

Is their diligence process up to our standard? Including investment memos in the data room is a good sign as long as they are high-quality.

Is their data room ready and up to our standard? Download this if you’re asking what the standard is.

On a scale of 1-10, how comprehensive are their memos? Is the writing clear? Are their points concise? Is it formatted professionally?

Why do companies choose them over other funds? This is a question that’s best to ask to their portfolio.

Does the person in charge of fundraising have charisma? Will they be able to raise the full fund, or will it be a painful process to win over new backers?

Can they be trusted with money? Do they have a history of good decision-making? Have they acted irrationally?

How are they incentivized to make decisions? How are their fund economics rewarding their decisions? What systems create those decisions? Are they acting for themselves, or do other people depend on them?

Do they know what they’re talking about? Do they have original thoughts? Are they repeating the same tidbits as everybody else?

Do they ask questions, or do they provide answers? Are they curious? Do they shut off new information or take it into account when making decisions?

Does their track record signal they have pricing discipline, or do they chase after hot deals? Have they been able to act rationally when others were not?

Are we investing in the fund because we think it will lead to better co-investment opportunities, or is our decision based on their ability to distribute capital? Is the partnership based on financial returns or access to deal flow we otherwise would not see?

What is their work background? Does their path to GP make sense? Are they investing in areas they know about?

What is their personal background? Where did they grow up? What did their parents do? These things matter and influence risk tolerance more than we think.

Have their prior investments mirrored what they communicated before making those investments? If they have invested out of a fund before, is the current strategy consistent with the previous one? If not, why?

Are we buying something more than returns if we were to commit to this fund? Is there something outside of returns (information, deal flow, other LPs, relationships, etc.) that is driving the decision?

Is the GP commit high enough that we feel they have enough skin in the game? Anything lower than 1% is a red flag IMO.

What do founders say about this fund? Back reference to find the truth.

What do other investors say about this fund? Back reference to find the truth.

What do LPs say about this fund? Back reference to find the truth.

Is this a brand you would be proud to be associated with? At the end of the day, venture is a branding game. So make sure your brand is protected at all times.

What is the re-up rate? Are previous LPs committing again, or have they had enough?

What is the internal carry structure of the fund? Is the majority of carry dominated by one person? Will there be an employee retention issue?

What is the structure of the investment committee? Does anybody have veto power? Do deals need to be unanimous?

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- Clay