
Having Won Over VCs, Y Combinator Turns to LPs - jordigg
http://techcrunch.com/2015/08/24/having-won-over-vcs-y-combinator-turns-to-lps/
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appleflaxen
For people like me who are startup-dumb and bad at skimming:

LP = Limited Partner

(I think)

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brudgers
LP typically stands for "Limited Partnership", a form of organization where
one or more general partners have agency and unlimited liability similar to
that of a general partnership and one or more limited partners whose liability
tends to be significantly less but whose role in the enterprise is generally
passive. There's a wikipedia article.

Generally, a limited partnership have been useful when there is a plan _not_
to bring on additional investors later, since later investors are able to
renegotiate terms. In other words, LP's are common when all the money ever
needed is going to be raised at once and any future expansion of the project
will be funded by traditional loans [a construction loan for a shopping
center] and from projected revenues [e.g. ongoing maintenance of the shopping
center once it is operational].

This also means that projects structured as LP's are not really tailored to
take advantage of hockey stick growth. Though an LP may use equity growth as a
means to an end, the focus is usually on income, and matching the cashflow
objectives of LP like investors is why individual Venture Funds have limited
lifetimes.

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rahimnathwani
A few clarifying points:

1) Private Equity funds (including VC funds) are often structured as Limited
Partnerships. The PE/VC firm and/or its principals are General Partner(s) in
the Limited Partnership. Investors are Limited Partners.

2) LLP = Limited Liability Partnership

3) LPs usually refers to Limited Partners (referring either to the Limited
Partners in a particular fund, or to PE/VC investors in general)

4) Not all the money needs to be invested up-front. Partnerships can be set up
such that an amount of capital is committed up front, but drawn down from
investors on an as-needed basis.

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brudgers
I don't disagree. To clarify though, it's often LP's all the way down to the
turtles...that is it is not uncommon that the limited partners in a limited
partnership are limited partnerships because limited partnerships are a way of
organizing capital that scales from a few hundred grand for 20 residential
lots to a billion or so for a VC fund.

From the individual partners point of view, their investment fuss are
committed upfront with the expectation that that commitment is adequate for
the entire project. Should the funds prove inadequate the investor may not
loose their shirt but will consider themselves lucky to escape with shortened
sleeves.

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jordigg
YC is doing the VC job by curating and selecting good bets. LPs can go
straight to these deals and avoid the middlemen. How is that going to affect
the traditional LP > VC > startup model? Will LPs go straight to "top"
accelerators and invest directly on these startups?

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danieltillett
I didn’t think that identifying the good bets was what YC was wanting to do?
Sam mentioned a couple of days ago that if YC was doing their job right the
median long term valuation of all YC companies should be 0 (i.e. more than
half should fail). Unless you are able to invest in all YC companies, then as
"dumb money" you are very likely to end up investing only in the duds.

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vasilipupkin
this is of course, assuming that VC money is any smarter than LP money. But is
it really? Many LPs are successful business people or investors themselves.
VCs are closer to the action and get better deal flow, but keeping deal flow
constant, they are no better at picking stocks than my betta fish

~~~
danieltillett
The top VC funds seem to display alpha, but I agree the vast majority of
general partners would be better replaced with a monkey and a dartboard.

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fra
LPs investing in startups directly, followed by retail investors (JOBS act).

If you thought we were already in a bubble, hang on to your seats, it's about
to get much worse.

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danieltillett
Well someone has to be left holding the bag. I worry that done badly this will
turn a generation off investing in tech start-ups.

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7Figures2Commas
Please don't worry. There will be no shortage of people who believe next time
will be different. That's the beauty of the cycle. As you near the end, some
subset of the people who swore they'd never be left holding the bag again
become bag holders.

~~~
danieltillett
Yes people seem to have short memories these days. After 1929 it took a long
time for people to think about investing in the stock market again.

What is probably more of an issue is that wide-scale bag holding will trigger
new regulations that will make it much hard for startups to raise money in the
future. Even if people want to invest it might prove impossible to raise money
in practice.

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refurb
This actually happened in biotech in the last 15 years. Everyone bought into
the promise of genomics and it all blew up (not genomics itself, but the idea
you can make oodles of cash from it).

The biotech IPO window was almost closed from ~2000 to 2012-2013. Look at it
now! Companies with nothing more than a promise raising $150M+ at IPO. I
haven't kept track, but it wouldn't surprise me if close to 100 biotechs have
IPOed in the last 2-3 years.

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danieltillett
Don’t I know this. As someone who runs a genomics company that started in 1999
I have been through this whole experience. When I started people were
literally giving me money for free and by 2001 you could not raise a cent even
if you were profitable.

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prawn
For those unfamiliar with the term, a family office is (from my understanding
speaking with a friend who manages one) a coordinated effort to manage wealth,
ideally for current and future generations. At their more basic level they
might passively invest in the share market and property, but they can be more
active and pursue higher-touch investments in particular businesses, etc.

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acidity
Slightly off-topic but is there any book or resource that a software engineer
like me can read to understand the basics of how VC operate, what each round
of funding mean, what one needs to know when one approaches a VC, difference
between VC/LP?

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sydneyliu
Venture Deals by Brad Feld is great for how to fundraise and he does go over
most of the basics and how things work.

Mark Suster, from Upfront Ventures, has a really great list of blog articles
you can read about raising VC: [http://www.bothsidesofthetable.com/pitching-a-
vc/](http://www.bothsidesofthetable.com/pitching-a-vc/)

This should give you a general idea of how VC's operate:
[http://founderequity.com/the-new-reality-of-venture-
capital/](http://founderequity.com/the-new-reality-of-venture-capital/)

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dudurocha
I think it would be easier to get all these LP's, make a big fund and make
follow-on investiment in all of companies portfolio.

better than a LP investing direct in a early-stage startup. This is bad for
both, the startups gets an unexperienced investor and the LP don't get to
manage portfolio the right way.

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imh
>...VCs treated their LPs a bit like mushrooms, keeping them mostly in the
dark...

The full phrase is to treat your <insert business relation> like mushrooms:
feed them shit and keep them in the dark.

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boomzilla
Does this mean YC is shifting from an incubator to a more full fledged VC
pipeline? Or is it just a lead generator for the YC companies to meet more
investors?

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GamblersFallacy
Two fundamental business strategies are bundling or unbundling. Looks like
bundling, not shifting from seed funding.

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rosstex
It would be nice if I knew what LP meant.

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shampine
I assume it means Limited Partner, though you're right, it should have been
defined prior to its use in the article.

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7Figures2Commas
> One Midwest LP who represents a family office and began receiving
> invitations to these affairs last year – one year after he began investing
> in privately held tech companies – has already backed a dozen startups out
> of YC. They represent one-third of his current portfolio of direct stakes.

> “I find [YC’s] batches are always the best of any accelerator class or demo
> day that I attend,” says the LP, who asked not to be named. “I’ve found a
> number of opportunities that were as exciting as any we’ve pursued.” YC’s
> endorsement, he says, is “a very important signal to us.”

An admittedly more cynical reading of this:

* Family office LP has very limited experience investing in privately-held tech companies.

* LP relies heavily on signals like "YC participant" because LP brings no unique investing insight to the table in this area.

The vast majority of LPs have no business investing directly in startups
because they have no ability to add value to the individuals and institutions
they represent, are incapable of performing adequate due diligence, and don't
have the bandwidth or experience necessary to manage these kinds of
investments.

Whether or not the current turmoil in the public markets is the start of
something bigger or not, LPs itching to make direct investments strongly
suggests that we are at or close to the peak in the current tech investment
cycle.

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nosuchthing
Isn't an LP just some person with a lot of cash but not enough cash to hire a
VC firm..?

Wouldn't this just indicate that VC firms are charging too much for LP's to
invest in a VC, or that there's some rich investors out there (LP's) who are
willing to risk direct investments in small businesses, rather than investing
blindly in the stock market?

Why would more direct LP investments indicate a peak in an "investment cycle"?

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7Figures2Commas
No, I don't think that's the primary driver here. I personally believe:

1\. There's a broader trend of LPs moving to invest directly in alternative
asset classes. There are a number of reasons for this. FOMO is one in this
particular market.

2\. Because the market is so hot, folks are more interested in ground-floor
(seed stage) investments that are harder to get exposure to in traditional
venture funds.

You must also realize that optimizing these direct investments is a PITA.
Newbie direct investors are going to learn a lot of harsh lessons when it
comes to pro rata rights in this market, assuming they even ask for and get
them.

