To quote one institution I know: what limited partners want is “PEAS”: People, Execution, Alignment & Strategy.
As a VC, I have a standard due diligence list for companies I’m reviewing. Similarly, limited partner investors have their own due diligence standards, and we manage our firm to keep in line with their expectations. The most important checklist is from the Institutional Limited Partners Association: ILPA Due Diligence Checklist.
A few other checklists for private equity funds in general:
- Private Equity Fund Investment Due Diligence
- Manager Due Diligence: Searching for Alpha in Private Equity
For VC funds:
- Ask an Investor: How do I perform due diligence on a VC?
- How LPs Conduct Due Diligence on Venture Capital Firms
- How to eagle eye a star VC fund: the ultimate guide for future LPs and VC fund managers
- OpenLP/Sapphire Ventures: How to build a better data room
- Sharing Your Track Record as an Emerging VC
Besides your data room, you also need a compelling cover email, to motivate people to look at your deck (which many won’t do). Your cover email should include at a minimum:
- capsule biographies of the leadership
- metrics on track record
- core investment thesis
- traction, i.e., where you are in your development ($ AUM raised, # investments made, etc.)
- Differentiation
- Link to pitch deck
The biggest risk for many VC and private equity funds is team risk. I wrote previously about how to assess and manage this:
- For assessing any organization: Ready to Join a New Management Team? Here’s How to Do Your Due Diligence First
- Specifically if you’re in the process of assessing a fund’s Partner dynamics: How to Negotiate a Partner Role at a VC or Private Equity Firm (or recruit a Partner to join you)
I suggest that if you’re looking to invest in a VC, it’s particularly helpful to evaluate team dynamics by separating the team. First, interview management together, in order to monitor their body language and who addresses which part of the business. Then interview them separately, one on one. This allows you to verify if you are hearing the same message from everyone.
I also suggest ask each person at the firm about their firm’s plans and their individual career path prospectively; everyone should have a clear vision of their future with the firm. Ask on what KPIs each Partner is evaluated. This will give you a clear view of how effectively the firm is managed.
Other resources
- The Non-Obvious Emerging LP Playbook
- So you want to be an LP?
- From an experienced GP: 4 Success Factors for Early-Stage Venture Investors
- How to research anyone’s political donations
Photo: PUBLIC WORKS DEPARTMENT EMPLOYEES INSPECT THE EXHAUST SYSTEM FOR VISIBLE LEAKS AT AN AUTO EMISSION INSPECTION STATION… – NARA – 557853 (Photo credit: Wikipedia)
