Eric Bahn has sat through some bad meetings with prospective investors in his funds. He says he’s had limited partners, or LPs, ask his female colleague how she’s able to run a VC firm while being a mother. He says he’s had LPs ask for too big a share of his firm’s pie in exchange for their check. And he says he’s even had some LPs hit on his female fellow general partners.
“We’ve spoken to thousands of LPs at this point, from high net worth [individuals] to some institutions,” Bahn, cofounder and general partner at pre-seed VC firm Hustle Fund, which has about $150 million in total assets under management, told me this week. “We've seen a bunch of characters along the way—most are really sweet, some are terrible.”
Bahn recently penned a Twitter thread on reasons he’s said no to LP checks before, and I rang him up to chat in a little more depth. It got me thinking: You’ll see lots of advice out there on when, as a founder, you should or shouldn’t accept money from a VC, and on what terms. But I haven’t seen as much written about the other end of the table—those giving the money to VCs to invest. As I discussed this week with James Currier, a general partner at early-stage firm NFX, the LP element of venture capital is still shrouded in mystery. “There's been very little discussion about how the LP system works…compared to how every other aspect of tech and the financial system works, with endless analysis and transparency and rumors and people talking about who's doing what to whom and how it's done,” Currier told me. He notes, “It's all very quiet and done sort of by word of mouth.”
But just as founders need to be thoughtful about who they take money from, VCs too should have some parameters when it comes to accepting checks. Bahn says that, especially for emerging managers who are raising their first fund, there’s “going to be a temptation to take some trade-offs from some straight-up assholes to fund you if the money is there.” Although he says he’s sympathetic to managers who accept these checks amid the rocky fundraising environment and acknowledges he’s privileged to be able to work with people he likes, he warns, “It might solve the problem today, but you can actually create a decade, or maybe even beyond that, of pain in working with the wrong kinds of partners.”
Some of the top red flags Bahn says he’s encountered—and heeded—include when an LP is insecure, meaning they’re name-dropping or talking about how rich they are constantly. “If it's just like, ‘Look, I'm a billionaire. I can do no wrong,’ like, ‘look at my string of girlfriends and my ridiculous party and cars,’” then “I just don’t want to deal with you,” he says. However, Bahn deems that more of a “pink” flag which can be less offensive than other red flags in certain circumstances, like if the LP is working on themselves.
Some other red flags seem to be common sense: Two unequivocal warning signs for Bahn are if the LP makes sexist comments or hits on partners during meetings, or if they make racist comments. (He says it’s not as frequent to encounter racism.)
Another warning sign is if the LP is asking for special economic terms or privileges if they give you a check. Bahn recounted a time when a prospective LP was willing to invest $50 million, which would have made up the whole fund, but asked that Hustle Fund make them and their son GPs. Bahn says that unless, for example, the LP has some industry expertise that the team wants for a specific sector they don't have exposure to, that’s something that would make him walk away. Plus, he noted, if LPs are asking for preferred economics, it sets a “terrible precedent” that you’ll have to explain to LPs in the future. NFX’s Currier similarly points out that if an LP wants to own more than 10% of their fund, that’s probably a no: “You don't want one LP to control your destiny.”
Meanwhile, Bahn argues if the LP is playing games with you—if they ghost you during negotiations or pose ridiculous questions as some kind of puzzle—it’s a bad sign. As he pointed out, “Do you really want to deal with that for 10+ years?”
And to state the obvious, VCs need to be careful about where the LP’s money is coming from, like sanctioned areas like Russia, notes NFX’s Currier.
But I also wonder, how do VCs like Bahn and Currier suss out a potentially red flag-worthy LP, if it’s not obvious? “A lot of this is actually just like an EQ [emotional intelligence] test,” argues Bahn, adding that he’ll often share a personal story and see if the LP reciprocates the vulnerability. He says he’s also in a Slack group of trusted VCs, and if there’s an LP that he deems “slightly suspicious,” he asks the group if they’ve had interactions with that person and have any perspectives to share.
Currier says NFX also conducts due diligence, including having several meetings, researching the LP’s social media presence, their team, and where their money comes from. They also typically have LPs give presentations on how they spend their money.
On the flip side, though, what are some green flags to look out for? Bahn says he thinks his approach is pretty unique, and “controversial,” compared to other VCs, in that he looks for LPs that can also become friends; meanwhile, he also says it’s important that LPs understand his firm’s mission, especially in fostering inclusivity for founders to gain access to Silicon Valley.
For NFX’s Currier, “We like it when people are giving away the money that we're making for them to people who need it more,” he says, adding that most of their LPs are endowments and foundations. He also points out that a long-term view—40 to 50 years—is important for prospective NFX LPs given the firm’s early-stage focus. In addition, he says he looks out for LPs that are thoughtful and experienced to be able to advise NFX.
The bottom line for VCs, according to Bahn, is to find out, “What is your personal true red flag?”
But he also makes what I think is a really important point—and something I fear is very relatable for many Term Sheet readers: If the “microcosm of VCs are complaining about this kind of stuff,” like sexism and onerous demands, “How bad is it for founders? Oh, it's a lot worse.”
Tiger’s fundraising cut: Mega investment firm Tiger Global is reportedly once again slashing its fundraising target for its new venture fund as the private markets remain icy. Per the Wall Street Journal, Tiger is targeting $5 billion, down from the $6 billion it was aiming to raise in the fall of last year, which is also well below what it had originally expected to raise in the double-digit billions, per the report. It appears even tigers are getting clawed by this rocky fundraising environment…
For those fellow HBO watchers, this meme I saw on Twitter pretty much sums it up:
Have a great weekend,
Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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