A startup can be growing fast and still face a sudden shutdown risk. The people funding the VC fund are limited partners, or LPs. Their need to get money back can shape what the VC firm demands from a company—especially when a fund is nearing its end. section 3.2 section 9.4
A limited partner is a third-party investor in a venture capital fund. The VC firm manages the pooled fund and invests that capital in high-risk companies. LPs are not the startup’s day-to-day investors; they are the investors whose money the VC is managing. section 9.1
Why LPs matter to a founder or CEO:
- VC funds commonly invest over their first 3 to 5 years, then spend several years managing and supporting portfolio companies. section 9.4
- Around a fund’s 7-to-10-year end, LPs may want either a return or a write-off for a failed investment. section 9.4
- That deadline can make investors push for an exit—an IPO, sale to another company, or sale to private equity—or abandon a turnaround before operating progress has time to compound. section 3.2 section 9.4
- A fund-backed angel group can resemble a VC from the startup’s perspective, but its investors may be individuals rather than the large retirement funds and university endowments associated with VC LPs. section 10.2
The NovaSoft warning
NovaSoft had a new direction and market progress, but its VC investors had held the company for almost 10 years. Their LPs wanted a return or a loss they could write off, so the board chose to shut the company down rather than wait for the turnaround. The practical lesson: before taking a venture-backed turnaround job, find out where each relevant fund is in its lifecycle. section 3.2 section 3.4
Do not treat a VC’s patience as unlimited. A company may have a credible plan and improving results, yet still be constrained by the fund’s calendar. If a fund is within two years of its end, treat that as a serious warning sign and plan or negotiate accordingly. section 3.4
