LP University — Understanding Limited Partners & Fund Selection

Fundamentals

What is an LP, and why do they invest in VC?

A Limited Partner (LP) is an investor who commits capital to a VC fund without making individual investment decisions — that's delegated entirely to the General Partner (GP). LPs are typically institutions: pension funds, university endowments, insurance companies, sovereign wealth funds, family offices, and funds-of-funds (vehicles that themselves invest across multiple VC funds on behalf of their own investors).

LPs allocate a portion of their broader portfolio to venture capital as an asset class specifically for its potential to generate outsized returns uncorrelated with public markets — accepting illiquidity (capital is typically locked up for 7-10 years) and high individual-fund variance in exchange for that potential.

The Cycle

How capital actually flows.

1

LP commits capital to a fund

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2

GP calls capital and deploys it into startups

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3

Startups grow (or don't) over several years

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4

Successful startups exit (acquisition or IPO)

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5

GP distributes proceeds back to LPs (after taking carry)

Fund Selection

How LPs actually evaluate a fund.

LPs conducting due diligence on a new fund typically weigh:

Track record — prior fund performance: DPI, TVPI, IRR across vintages

Team — GP experience, stability, and any recent partner departures

Strategy — clear, differentiated thesis and stage/sector focus

Portfolio construction — check sizes, reserves strategy, ownership targets

Fund size discipline — raising a size appropriate to the stated strategy, not just "as much as possible"

References — how the GP is regarded by founders and co-investors

See the Glossary for full definitions of DPI, TVPI, IRR, MOIC and the J-curve — the core vocabulary of fund performance evaluation.

Try It Yourself

A simulated fund selection exercise.

Three hypothetical funds are raising. As an LP with one allocation to make, which would you back? Click one to see the kind of reasoning an LP might apply.

Fund A — Emerging Manager

First-time fund, $25M. GP was previously a senior operator at a well-known startup, now investing personal experience into a sector-focused thesis. No prior fund track record.

Fund B — Established, Strong Track Record

Fund IV from a firm with three prior funds, each showing solid (not spectacular) DPI and TVPI. Stable team, no recent partner departures, disciplined fund sizing.

Fund C — Fast-Growing, Aggressive Scale-Up

Fund III, 4x larger than Fund II, raised quickly on the strength of one breakout portfolio company from Fund I. Strategy has shifted from early-stage to also writing much larger growth checks.