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Something I realized late is that LPs are usually buying something more than returns when they decide to back a given fund.
Sure, everybody wants returns, but there are tons of more subtle reasons why LPs lock up capital for ten years.
Ryan Hoover (@rrhoover) on why he backs fund managers, what he is buying, and what he looks for.
We break that down below …
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Why LPs actually invest in funds
Ryan Hoover is one of the best in the world at the intersection of operating (Founder of Product Hunt), investing (GP @ Weekend Fund), and allocating (LP through personal holdings).
He says the quiet part out loud in this tweet to share some light on why he writes checks as an LP.
Here’s why he invests as an LP:
Learn. I love reading quarterly LP updates. Investors highlight new investments, explain their perspectives on the market, and share the results of their experiments.
Get deal flow. I’m often introduced to new companies that spark my interest. Fund managers are often happy to make an introduction when there’s allocation available and sometimes between rounds.
Support fellow investors. Fundraising, especially today, is hard! In addition to my tiny check, I often introduce other LPs to the fund. More on that below.
Make money. This is the lowest priority because my checks are so small, not because I don’t believe the funds I back will do well. Once I have more liquidity to tie up for 10+ years, this will change.
Here’s what he looks for:
Small funds, ideally sub-$30M, investing in pre-seed and seed. Small funds have historically delivered better returns on average. A $300K check into an early-stage opportunity can be a multiple-fund returner for small funds, whereas larger ($250M+) funds are required to invest far more capital to capture meaningful ownership and outcomes. This is almost always far more difficult. These funds often need to lead, beating out a growing number of competing investors, including the behemoth multi-stage funds with massive teams and scout networks.
Highly connected generalist investors with unique access or deep specialists focused on a specific vertical. Generalist funds are helpful for deal flow as they align with what we typically invest in at Weekend Fund. Specialist funds are helpful for diversification, providing more exposure to industries I don’t invest in (such as biotech, deep tech, and climate tech).
Investors that take the job seriously. Managing other people’s money is a responsibility. I want to back investors who are thoughtful, disciplined, and committed to the craft.
Here are some funds he has backed:
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(Founder @ Confluence.VC | GP @ Outlaw)
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