LP Academy / How to become an LP / Lesson 6 of 8
Questions to ask any GP
The diligence a first-time LP can actually do, and the answers that should worry you.
About 7 minutes. Educational only, not advice.
You are choosing a person
An LP’s only real decision is which GP to trust. You cannot pick the companies. You can pick the picker. Institutional LPs run long diligence processes, but the questions an individual can ask in two conversations cover most of what matters.
About the strategy
- What do you invest in, and what do you say no to? A GP who invests in everything has no edge.
- Why does this strategy need a fund of this size? The answer should connect check size, stage and the number of companies.
- How many companies will the fund back, and how much is reserved for follow-on investments?
- What happens if the market changes halfway through the investment period?
About the GP
- What have you invested in before, personally or at another firm, and what happened? Ask about the losses as much as the wins.
- How much of your own money is in the fund?
- Who else works on the fund, and what happens if you cannot continue? For a solo GP this is the key-person question, and the LPA should have an answer.
- How do founders find you, and why do they choose you over other investors?
About operations
- Who is the fund administrator, and who does the audit? Small funds may skip an annual audit to save money. Know whether yours does.
- How often will I hear from you, and what will the letters contain?
- What are the fees, the carry, the fund life, and any terms that differ from the standard ones? Ask them to name the non-standard terms rather than asking you to find them.
- Can I speak to an LP in a previous fund, or a founder you have backed?
Answers that should worry you
Projected returns of any kind. Pressure to decide quickly. Reluctance to share the LPA before you commit. A track record that only includes winners. Vagueness about how much the GP is investing personally. Strategy language that would fit any fund.
What a good answer sounds like
Specific, a little boring, and honest about what has not worked. A GP who says “we lost money on these three companies and here is what I learned” is telling you something a marketing deck never will.
Before you move on
Which three questions would you ask first? Which answer would end the conversation for you?