Hi! I’m glad you’re here. You’ve made it to issue #108 of VC Demystified🪄.
Today’s deep dive: Who actually funds VC funds and why it changes everything for aspiring VCs and founders.
My personal mission is to open as many doors as possible for other people and this newsletter is just one avenue to do that. As always, I will continue to post VC insights daily for free across my socials. This newsletter may contain paid partnerships or affiliate links.
VC Job Openings Preview (3 of 9)🪄
LvlUp Ventures is hiring a VC Dealflow Partner / Venture Scout.
Location: Remote
https://www.linkedin.com/jobs/view/4409064371/
16VC is hiring Summer Interns.
Location: Globally
https://jobs.polymer.co/16vc/39982
Path Ventures is hiring a Principal.
Location: n/a
https://principal.path.vc/
Read time: 6 minutes
Many don’t realize how much the investors behind a VC fund play a role in how firms operate.
General Partners (GPs) run the VC firm; Limited Partners (LPs) provide the capital.
And though anyone can type into Claude or ChatGPT to find out what Limited Partners are, the answers won’t show you how it affects you as an aspiring VC and/or founder.
And you may think the types of LPs that are one degree away from you don’t matter - I’m here to tell you they DO!
Let’s get into the 7 different types of LPs and how they change how a VC fund operates - its size, return requirements, investment timeline, risk tolerance, and even how portfolio companies are treated.
After reading this, you should have a different perspective on how to evaluate a VC job offer, a term sheet, and a VC relationship.
*Bonus: At the end, I’ll also share two tools that help you find and contact LPs if you’re interested in raising your own fund!
Institutional vs. Non-Institutional LPs
If you’ve been in or around the VC space for any amount of time, you will have heard the term "institutional LP". Here's what it actually means.
An institutional LP is an organization, not an individual, investing capital on behalf of others with formal governance, dedicated investment teams, and defined mandates.
A non-institutional LP is an individual investing personal capital. No committee, no mandate, no formal re-up process.
Institutional LPs are often preferred in the market (even if no one says that out loud). Here’s some reasons why:
Stable, large capital pools - They deploy from defined allocation buckets that don't shift based on a bad quarter or personal liquidity events.
Re-up reliability - Formal processes for recommitting to managers they believe in. If you perform, they come back for Fund II and Fund III.
Credibility signal - Closing an endowment or pension fund is huge validation (bc they are much harder to close). Other LPs treat it as a diligence shortcut.
Longer horizon - Capital not tied to any individual's personal timeline or liquidity needs.
Now getting into the specific LP types - 6 of 7 below are considered institutional. High Net Worth Individuals are the only exception. Family offices are a nuanced middle ground, explained more shortly.
For each of the 7 types, I'll break down what it signals for aspiring VCs evaluating a fund to join, and what founders should know when they take capital from a VC backed by that LP.
The 7 LP Types
1. High Net Worth Individuals (HNWIs)
These are wealthy individuals writing personal checks into VC funds. Not a company, not an institution, just a person with enough money to invest. They're often successful founders, operators, or angels who want exposure to early-stage investing and the network that comes with it.
Institutional? No. There's no formal process, no committee, and no guarantee they'll invest in the next fund.
What it means for aspiring VCs: These funds tend to be earlier stage and scrappier. More autonomy day-to-day, but less certainty that the firm will raise a Fund II.
What it means for founders: Often the most hands-on money. HNWIs backing a fund are usually operators themselves and push their VCs to be useful beyond the check.
2. Family Offices
When someone gets extremely wealthy, they sometimes set up a private firm just to manage their money. That's a family office. They invest across stocks, real estate, private equity, and VC funds. A single-family office (SFO) manages money for one family. A multi-family office (MFO) pools capital across several wealthy families.
Institutional? Nuanced. Larger family offices with formal teams and processes are treated as institutional. Smaller ones managing a single family's wealth blur the line.
What it means for aspiring VCs: These funds tend to be leaner and more flexible. Less red tape, more relationship-driven. Good place to learn if you want to be close to decision-making early.
What it means for founders: Family office money is patient. There's no hard deadline to return capital (usually), so your VC is less likely to push you toward an exit before you're ready.
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