Sarah Lacy and Adeo Ressi discuss “institutional LP love”: when large LPs (sovereign wealth funds, endowments, pensions, insurers, corporates) court new fund managers with dinners and attention, even though they usually cannot or will not invest in Fund I (often Fund II as well). The point of the courting is often to build a relationship now so they can invest in Fund III or Fund IV.
What’s being described is not a scam or bad faith—it’s simply how institutional capital works, and many first-time managers misread it.
From a seasoned VC’s point of view:
- Institutional LPs are relationship managers, not capital allocators (yet).
The people taking you to dinner are usually on the scouting side. Their job is to keep optionality, not to underwrite risk on unproven managers. Warm signals ≠ investment intent. - Fund I is for proving discipline; Fund II proves repeatability; Fund III is when institutions show up.
Institutions don’t want to underwrite you. They want to underwrite a track record plus a machine. Until you’ve shown you can source, select, support, and return capital across multiple cycles, you’re not investable at scale. - LP love is cheap; first close capital is scarce.
Dinners, conferences, and praise cost institutions almost nothing. Your time is the scarce asset. If you’re pre-first close and spending weeks chasing institutions, you’re misallocating effort that should be spent closing anchor LPs, building a real portfolio, and generating proof points. - The real risk isn’t “no check”—it’s bad money.
Early institutional checks often come with side letters, reporting burdens, audits, geographic or impact constraints, and governance overhead that a small fund is not staffed to handle. Seasoned VCs have seen many promising funds underperform because the GP spent time complying instead of investing. - Institutions never say no—on purpose.
They optimize for future access. Saying “no” to the next breakout manager is career-limiting for an LP. So they stay warm with everyone and let process (fund number, mandate, timing) do the rejecting quietly. - The correct response to LP love is process questions, not enthusiasm.
Experienced GPs don’t ask “Do you like us?”
They ask:- What fund number do you typically enter?
- Do you lead or follow?
- First close or later close?
- What proof points unlock an exception?
The answers tell you everything you need to know.
- Results erase most of these dynamics—but only after you have them.
Exceptional DPI or clear breakout companies compress timelines and loosen mandates. Until then, no amount of relationship building substitutes for outcomes. - You’re building a firm from day one, even if your LPs are friends.
Seasoned VCs know institutional diligence is forensic and retrospective. Sloppy Fund I behavior (KYC gaps, conflicts, solicitation issues, side gigs) doesn’t disappear—it compounds. Clean operations are not about today’s LPs; they’re about tomorrow’s. - Smart GPs treat institutions like future acquirers.
You don’t sell to them today—you prepare the asset. That means:- Clean governance
- Consistent reporting
- Professional AGMs
- Measured communication
- Zero surprises
- The quiet truth:
If an institution really wants into your Fund I, it’s usually because:
- You’re a spin-out with an inherited track record, or
- They’re buying signaling value or policy outcomes—not pure returns.
Both come with tradeoffs.
Bottom line (seasoned VC view):
Enjoy the dinners. Take the meetings when you can afford the time. But raise Fund I with individuals, family offices, and aligned early believers. Focus obsessively on performance and operational cleanliness. Institutions will arrive when your fund stops needing them—and that’s exactly when you want them.
Key points worth noting from the interview:
- Don’t mistake attention for imminent capital. For most managers, large institutional checks in Fund I/II are extremely rare (they cite <3% of global fund launches).
- Timing and process matter. Institutions often won’t be first money in; even if interested, they may say “we’ll invest after others do,” meaning you shouldn’t rely on them to get to first close.
- When it’s worth your time: If your current fund is already secure, relationship-building is valuable because you’re building a firm, not a single fund. If you’re scrambling to close Fund I, heavy time spent on institutions can be a poor tradeoff.
- How LP love starts: It can be inbound (scouting teams whose job is to “wine and dine” future managers) or outbound (naive managers pitching big institutions early; or meeting them at Davos/conferences).
- How to engage productively: Ask directly about their mandate and entry point (Do they back first-time managers? Which fund number? Do they join first close?). Stay in touch via newsletters, occasional personalized updates when something material happens, AGM invitations, and meeting when schedules naturally overlap.
- They won’t say “no.” Their goal is optionality; they avoid burning bridges with managers who might later “get a hot hand.” So you must decode seriousness by learning their process, not their enthusiasm.
- Results trump gamesmanship. Exceptional performance can cause exceptions (institutions investing earlier), but relationships still matter—if you’re performing well and have never engaged large LPs, it can raise suspicion later.
- Beware “strings attached.” When institutions do invest early, they often require side letters and heavy reporting/impact analysis, audits, geographic constraints, etc., which can distract small teams and hurt performance. They cite Europe/EIF as an example where constraints can act like a “ball and chain,” sometimes getting worse in subsequent funds.
- Set up Fund I like you’ll be institutional-ready later. Don’t cut corners: do KYC/AML, manage conflicts, avoid improper solicitation, handle regulatory issues (e.g., EU LPs/licensing), and generally operate cleanly—because future institutional diligence will surface early mistakes. If mistakes happened, fix them and be able to explain how you fixed them.
- Anecdote: “LP love” can include lavish, ostentatious hospitality (expensive bottles, palace invitations), underscoring the theme: enjoy it, but don’t confuse it with a commitment.
