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Why those fancy dinners might not mean what you think they mean
The Roses Have Thorns
You're a new fund manager. A sovereign wealth fund wants to take you to dinner. Their average check size is $30 million. Great news, right?
Not so fast.
In the venture capital industry, there's a term called "LP love." And while it feels amazing to receive, it can be one of the most dangerous distractions for emerging managers if you don't understand what's really happening.
"You think you want these institutional LPs," says Adeo Ressi, founder of VC Lab. "But be careful. Those roses may have thorns attached to them."
What Is LP Love?
Large institutional LPs (sovereign wealth funds, endowments, pension funds, insurance companies, and large corporations) have dedicated teams whose entire job is to scout managers to invest in. These people are paid to wine and dine fund managers in case one of them becomes the next Sequoia or Andreessen Horowitz.
"They're actually just people whose job it is to wine and dine managers in case they're the next big thing," Ressi explains. "So you go to a conference, you're networking, and suddenly you've met the head of an Abu Dhabi sovereign wealth fund. He wants you to fly out to meet the team. He's taking you to dinner tomorrow night. This is amazing."
Here's the problem: the usual rule for these larger investors is that they're prevented from investing in new managers.
The Timeline Reality Check
The definition of "new manager" varies by institution:
- Some define it as Fund I only
- Others consider Fund I and Fund II as "new"
- "Emerging managers" typically means Fund II and Fund III
- For some institutions, even Fund III and Fund IV qualify as emerging
"Where these big guys really start to invest is on Fund III and Fund IV," says Ressi. "So if they're taking you out to dinner and you're on Fund I or Fund II, what they're doing is building a relationship with you today to invest with you in Fund III or Fund IV."
The numbers are stark: less than 3% of funds worldwide get institutional LP money in Fund I or Fund II. Those rare funds that do typically take 24 months or more to close, and the managers usually have prior fund management experience and pre-existing LP relationships.
"For everyone else, the 97% plus of managers, they're going to get to know you in Fund I, get to know you in Fund II, and come in on Fund III."
The Dangerous Assumption
The real danger of LP love is the assumption it creates. Managers experience all this attention (dinners, drinks, introductions to founders) and assume the money is coming.
"A lot of managers just assume they're coming in on Fund I and Fund II," Ressi warns. "They think, 'I got all this money coming in because I'm experiencing all this LP love.' They spend a lot of time, and then when they're ready to close, the LP says, 'I'm not investing in this fund' or 'I'm not coming in right now.'"
Even worse: in the rare case an institutional LP says they'll come in early, they'll typically say they'll invest "as soon as other people come in." They won't be your first money. They'll wait until you've raised from others.
When LP Love Is Worth Your Time (And When It's Not)
It's a waste of time when:
- You're hunkering down trying to close your current fund
- Every minute needs to be focused on generating cash for your closing
- You're counting on this money for your current raise
It's valuable when:
- Your current fund is in good shape
- You're starting to think about Fund II or Fund III
- You have bandwidth for relationship-building that won't pay off for years
"If you have all the money you need and an institutional LP wants to take you to dinner to invest in maybe Fund III or Fund IV, that's definitely not a waste of your time," Ressi says. "But if you're trying to close and every minute needs to generate cash, then it's a total waste of time."
How to Build Relationships the Right Way
Once you understand the timeline, you can build relationships strategically. Here's what institutional LPs actually want:
1. A Newsletter
Put them on your update list. Not much more than that for regular communication.
2. Personalized Updates for Big Wins
When something major happens (like a 55x markup in a portfolio company) send a personalized note.
3. AGM Invitations
Invite them to your annual general meeting. They may not attend, but the invitation itself signals professionalism. If they do attend and you run a great AGM, they walk away thinking, "This is someone we might want to get into on the next fund."
4. Opportunistic Meetups
These LPs travel constantly between San Francisco, New York, London, and beyond. If they're in your city or you're both attending a major conference, suggest a drink.
The best way to get to them initially: Find a manager they've already invested in and get a warm referral.
The Questions You Must Ask
Here's what most managers get wrong: they never ask about process because things seem to be going well. But institutional LPs expect you to ask these questions:
- "Have you invested in other first-time managers?"
- "What fund do you generally enter?"
- "How do I keep in touch with you for the next two years while I'm working towards Fund III?"
- "When I'm ready, how do I signal? Do you come in on the first close or second close?"
"You are expected as a manager to ask those questions," Ressi emphasizes. "But most managers in the throes of LP love make the assumption that this institutional LP loves them because they're going to dinner, getting drinks, meeting founders with the LPs, but they never ask about the process."
The Real Game: Results Trump Everything
Here's the ultimate truth: if you have killer results, all this gamesmanship becomes secondary.
"If you have something killer happen in your fund, you're going to be swatting them off like flies," says Ressi. "With fabulous results, people will start to make exceptions and come in even on Fund II."
Ressi shares the example of a Canadian fund manager with a 22x DPI (meaning investors got $22 back in cash for every $1 invested). Despite incredible results, she never built relationships with large institutional LPs, which created its own problems.
"If you're doing well and not talking to them, it's like something's wrong," Ressi notes. "You want to have some of these conversations even before you get the returns."
The Strings Attached to Early Institutional Money
For the rare managers who do get institutional money early, be warned: it comes with significant strings.
Side letters from institutional LPs can require:
- Detailed reports for every deal
- Quarterly impact analysis on jobs, environment, etc.
- Hiring consultants to meet reporting requirements
- Annual audits (very expensive for small funds)
- Geographic investment restrictions
"The less proven you are, the more strings you're going to expect with institutional capital," Ressi warns.
The burden of compliance can actually hurt your returns. "What you end up seeing is those funds underperform compared to their peers because you're sitting around writing TPS reports versus scouting deals to invest in."
Don't Cut Corners in Fund I
Even if institutional money is years away, you must build your fund properly from day one.
Common mistakes that will disqualify you later:
- Not doing KYC/AML on investors ("They're all my friends")
- Not clearing conflicts of interest
- Publicly talking about the fund before closing (breaking general solicitation rules)
- Bringing in European LPs without proper licensing
"All of this stuff is easily discoverable when you do due diligence on a firm and a fund," Ressi says. "One day you'll be in late due diligence and they'll say, 'Sorry, we can't invest right now. We're overallocated.' They'll never tell you why, but it's because of one of these things."
The good news: most mistakes can be fixed. In Emerging Institute, Ressi notes that the first four to six weeks with many managers involves cleanup from Fund I errors. "I don't want to make it seem like every mistake that you make, conscious or unconscious, is not fixable. You can fix these things. And I think you get a lot of forgiveness points if you have fixed them."
The Bottom Line
Institutional LP love is real, but it's a long game. Understanding the timeline (and not confusing relationship-building with imminent investment) can save you months of misdirected effort.
Key takeaways:
- Less than 3% of Fund I/II managers get institutional money
- Most institutions invest starting at Fund III or IV
- Build relationships, but don't count on early money
- Always ask about their process and timeline
- Focus on results. They trump everything else.
- Don't cut corners in Fund I. It will be discovered later.
Enjoy the dinners. Appreciate the attention. Just don't mistake LP love for LP commitment.