Should LPs evaluate a GP's personal capital commitment to the fund as a fixed percentage benchmark, or account for career stage and liquidity differences?

Harry Stebbings · May 8, 2023

GP commits as currently structured are wrong: they should be proportional to personal wealth and flexible, rather than arbitrary fixed percentages that exclude brilliant but less wealthy people.

Arbitrary 2–4% commit levels aren't proportional to wealth and therefore prohibit a large amount of diverse but brilliant talent from becoming GPs.

Scope: still agrees with the underlying intent of aligning incentives

58:57 20VC: Why VC Subsidizes the Wrong Type of Business, Why Capital Gains Tax is Crazy, The Biggest Misalignments Between VCs, Founders and LPs, Why Business Model - Product Fit is as Important as Product-Market-Fit with Chris Paik @ Pace Capital

Beezer Clarkson · Oct 18, 2023

For emerging managers, management fee and GP commit should be judged against the fund's business case — headcount, cost structure, what the money is actually used for — not a universal standard

Some funds in their program have fees so low she worries they can't pay rent; a 2.5% fee on a small fund is unsurprising because there are simply fewer dollars

Scope: specific to emerging/smaller managers; LPs still like to see fees step down as later funds layer on

32:38 20VC: Are LPs Open For Business? What Does it Take to Raise a Fund Today? How Has What LPs Want to See in Fund Investments Changed? Why Do LP Incentive Mechanisms Need to Change? Which Funds Will be Hit Hardest with Beezer Clarkson @ Sapphire Partners

Harry Stebbings · Sep 6, 2024

LPs get this wrong by putting solo GPs in the same bucket as billionaire GPs, when a 1% commit for a solo GP is everything he has.

For a solo GP a 1% commit is everything he has, unlike for a wealthy GP

11:23 20VC: Why VC is a Ponzi Scheme Today | Why Most VCs are Bankers | Why Big VCs Ruin Startups | Why Incentives in VC are Broken | Why American Dynamism is a Tool for VCs to Raise Money with Nick Chirls, Asylum Ventures

Harry Stebbings · Nov 20, 2024

GP commits are a flawed signal because they ignore proportionality — a young emerging manager's 1% is not comparable to an established GP's larger commitment

Early-career managers lack the liquidity that successful established investors have

32:47 20VC: Turning $16.5M into $2.1BN; Lessons from the Greatest Venture Investment in European History: UiPath | Why VC is Not Being Commoditised | Why Price Does Not Matter | Lessons on Loss Ratio, Selling and Signalling with Cem Sertoglu

Cem Sertoglu · Nov 20, 2024

It is inexcusable for LPs to hold young emerging managers to the same GP commitment hurdle as established managers

Without the outcome from his first fund he could not have put a large GP commitment into fund three

33:08 20VC: Turning $16.5M into $2.1BN; Lessons from the Greatest Venture Investment in European History: UiPath | Why VC is Not Being Commoditised | Why Price Does Not Matter | Lessons on Loss Ratio, Selling and Signalling with Cem Sertoglu

Harry Stebbings · Jul 14, 2023

Large GP commits (e.g. 3%) are a source of misalignment rather than alignment

On a $140M fund that's over $4M, which a manager who hasn't been earning for years can only meet by borrowing

37:42 20VC: Why Fund Sizes Should Be Smaller, Should Founders Also Have Their Own Funds, Is Emerging Markets Investing Gone, Is Fintech Investing Dead & Who Will Be The Winners and Losers in VC in the Next 10 Years with Sheel Mohnot, Co-Founder @ BTV

Jake Gibson · Jul 14, 2023

A GP commit that is too high creates misalignment

A financially strapped GP may sell their position in a company at Series B to return capital to themselves rather than hold

38:01 20VC: Why Fund Sizes Should Be Smaller, Should Founders Also Have Their Own Funds, Is Emerging Markets Investing Gone, Is Fintech Investing Dead & Who Will Be The Winners and Losers in VC in the Next 10 Years with Sheel Mohnot, Co-Founder @ BTV

Cem Sertoglu · Nov 20, 2024 · hedged

Personal wealth should help an investor's risk equation, but a very large GP commitment cuts both ways because it can make the team nervous and risk-averse

A high GP commit signals confidence and aligns with LPs, but an LP argued that the fund is meant to be the highest-risk part of their portfolio and GPs with a lot of personal money in it may pull back

Scope: their GP commit is close to 10% of a $250M fund

31:54 20VC: Turning $16.5M into $2.1BN; Lessons from the Greatest Venture Investment in European History: UiPath | Why VC is Not Being Commoditised | Why Price Does Not Matter | Lessons on Loss Ratio, Selling and Signalling with Cem Sertoglu

Harry Stebbings · Apr 28, 2023

GP commits are meaningless because GPs typically fund them out of management fees, which drains capital they could invest in building their own firms

It only ticks a box for LPs — the GP is effectively using LP dollars to fund the commit, so it signals nothing about alignment and reduces firm-building capacity

37:53 Gp commits funded from management fees signal nothing and drain firm building capital

Nick Chirls · Sep 6, 2024 · hedged

Even GPs who have made a lot of money in venture generally don't put their own money back into their firms.

10:48 Wealthy gps rarely reinvest their own money into the firm

Nick Chirls · Sep 6, 2024 · speculative

Asking GPs for tax returns to estimate their wealth could be valid LP diligence for sizing GP commits.

You could back out roughly what they make and what they're worth, making commit expectations proportionate

11:36 Tax return based wealth verification would improve gp commit sizing

Harry Stebbings · Oct 18, 2023

The industry debate over fees and GP commits is misguided

Billionaire fund founders can put in far more money than he can, but that doesn't make them more committed

32:26 Gp commit amount reflects wealth not commitment level