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What Is An LP In Venture Capital with Peter Harris - YouTube
Channel: Peter Harris
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if you are wondering what is an lp in
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venture capital and why they matter then
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you are in the right place in this video
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i'm going to tell you exactly what an lp
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is and why they can either make or break
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your company think about that you didn't
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even know what an lp was necessarily and
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here i am telling you it could break
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your company stay until the end and i'll
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share how a russian lp almost killed a
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deal
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[Music]
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so today we're going to talk about what
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is an lp
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what are the different types of lps and
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why knowing who the lps are and what
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types they are
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can be crucial when you're out
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fundraising first let's start what is an
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lp well lp stands for limited partner
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and basically it's the investors in a
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venture fund or private equity fund so
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let's say i decide i want to invest in a
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venture fund when i do that i'm going to
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go to that fund and i'm going to say i
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want to invest a million dollars now i
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don't take a million dollars out of my
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pocket and give it to the venture fund
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instead i make a commitment so over the
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next 10 years
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i'm going to commit a million dollars
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and whenever the venture capitalist
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needs that money they're going to call
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me up and they say hey peter remember
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when you promised to give us a million
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bucks well we need 50 000 of that 100
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000 of or whatever it might be so we can
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go make this investment in this sweet
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company that we just found the way that
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all works is like i am an investor and
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i'm actually called a limited partner
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because those funds when i wire them in
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they're gonna go to an entity called a
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limited partnership so that limited
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partnership will own a bank account and
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my funds will wire into that bank
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account they will collect all of the
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funds from all of the limited partners
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or investors and then they will invest
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that into that really great exciting
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company that they just found the limited
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partnership like i said earlier is the
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actual fund and it's actually owned by
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the limited partners but they're limited
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and why are they limited well they're
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limited in two fundamental ways the
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first one is as an investor i give up
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some of my control in terms of where my
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money is gonna go now the other way that
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they're limited is through liability so
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let me give you a real world example you
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remember when mitt romney was running
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for president there was an article that
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came out that he was an investor
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in a company called ashley madison now
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if you don't know what afternoon madison
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is it's uh it's an interesting website
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where basically it's like a dating site
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for people that want to cheat on their
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spouse and so they were making a big
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hoopla around like here you've got mitt
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romney who like talks about family
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values and yet he's invested in this
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company that helps people cheat it
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turned out that what actually happened
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was that he had invested in a fund that
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had invested in another fund that owned
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some
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equity in ashley madison and so they
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traced it all back through but because
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his liability was limited he was able to
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credibly say like hey look like i didn't
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make that investment i didn't control
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that that was made by somebody else but
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in that way it limits the liability
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because ultimately the limited partner
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doesn't have any control now that can
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also be important because they want may
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want to avoid conflicts of interest and
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other things so those are the two ways
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in which
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the limited partners are quote unquote
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limited now there are more ways but but
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those are the two most important ones
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before we dive into point two i've got a
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trivia question for you
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what do teachers
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firefighters policemen and other
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government workers have to do with
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the largest investors in private equity
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and venture capital out there stay tuned
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because we're going to talk about it in
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this next point let's talk about the
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different types of lps lps usually fall
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into the following main buckets you have
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high net worth individuals family
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offices endowments pension funds
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insurance companies asset managers and
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sovereign wealth funds so let's talk
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about high net worth individuals these
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are people with over a million dollars
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in assets outside of their primary
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residence the idea that they're they
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have a million dollars of liquid assets
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minimum so most high net worth investors
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that invest in venture capital actually
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have you know
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probably 5 10 50 100 million dollars in
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assets now once you start hitting up
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into the 50 to 100 million range it
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might make sense for you to start a
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family office now a family office is
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this realm of ultra high net worth
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individual or family that has
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accumulated so much wealth that they
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they can actually hire they need to hire
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people to manage that money for them
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they've got that big chunk of cash and
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they've got to invest it
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so they'll invest in public equities and
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real estate and debt and bonds but a
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portion of it oftentimes they'll invest
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in venture capital all right the next
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category that's very typical is
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endowments these are large pools of
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capital from universities and
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foundations and they invest in venture
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capital and lots of other assets
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so that they can donate more or give out
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more scholarships they're investing 95
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percent
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of the their assets
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into businesses like venture capital and
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then they're taking the returns and
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they're donating five percent of their
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total assets every year to maintain
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maintain their status as a foundation
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the next category is pension funds now
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if you remember my trivia question from
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before that's
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where these two come together so pension
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funds are some of the largest investors
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in venture capital and private equity as
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limited partners they manage the pension
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funds the retirement funds of doctors
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firefighters policemen and women and
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other government workers and so what's
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kind of cool is that as a venture
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capitalist if you're taking money from a
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large pension like calpers
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you are helping fund the retirement of
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doctors and firefighters and police
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officers which is kind of a cool thing
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another category of limited partner
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that's pretty common is an insurance
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company so big insurance companies make
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money by taking your premiums that you
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pay monthly or yearly and investing them
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and then pocketing the profits so it's
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very common that you see
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and insurance companies putting capital
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behind private equity in venture another
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very common category is asset managers
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now i say asset managers which is a
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pretty broad statement but that can
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include a whole wide range of businesses
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such as fund of funds which is literally
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like a fund that invests in other funds
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but it could also be large banks or or
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wealth managers another example could be
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a sovereign wealth fund so lots of
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countries have put funds aside for
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investing in other countries
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norway for example clocks in at the
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biggest with almost 1.5 trillion dollars
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in their sovereign wealth fund now not
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all 1.5 trillion dollars is being
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invested in private equity and venture
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capital it could also be deployed into
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real estate debt bonds hedge funds etc
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etc but a portion of that is deployed
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there hopefully that was a good overview
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on the different types of lps that exist
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but so what who cares well let me tell
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you why you should care first
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confidentiality let's say that one of
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your vc's
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lps is actually a competitor to you
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often times vcs will disclose
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information about your business to their
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lps and you might not want that
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information getting out these lps are
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under nda non-disclosure agreements
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and most vcs are very careful about what
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information gets shared but knowing who
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their lp base is might be important for
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you as a business to control where the
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the critical information about your
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business gets shared the next reason
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that you should care is misaligned
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incentives so while this rarely happens
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it sometimes can be an issue where the
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lp in the venture fund has different
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objectives than you do for your business
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for example there was this one deal
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where the biggest lp in the fund
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required that every deal had to have a
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clause where the vc could force the
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company to liquidate because this
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particular lp didn't want to get stuck
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holding the stock of a company through a
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fund
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and so you know that vc had to have that
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term in every single deal and for some
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companies like
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that could be really tough like what if
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you're not in a good
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spot and the vc says nope we have a term
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you have to sell because rlp wanted that
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so that could be like an example of
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where incentives might not be aligned
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that you should be aware of and then the
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last thing is misaligned interests and
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objectives
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you may have a company that's trying to
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to disrupt
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energy right and you want to come out
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with like you have this new great cool
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alternative energy platform that's
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totally gonna disrupt and put out of
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business big oil well
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you may want to make sure that the lps
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of the fund is backing you aren't a
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bunch of people making money from big
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oil so you know sometimes that's
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something to be thoughtful about is like
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hey
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who are the investors are they the types
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of people you want to support now this
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can also flip the other way which is if
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you have large pension funds that are
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made up of a bunch of teachers for
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example
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and you want to benefit those teachers
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then it could actually be kind of a
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benefit
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another example is
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uh your lps or the venture capitalist
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lps may bring strategic value to your
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business so for example i met with this
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fund recently they are they do impact
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investing in the energy space and a lot
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of their lps their investors are large
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corporations and one of the things that
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they were telling me is that they have
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generated literally hundreds of millions
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of dollars in revenue
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for their portfolio companies from their
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lp base which is super cool now the last
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thing i'll tell you and this is maybe
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one of the key takeaways it's as
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important to understand who your the lps
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are of a venture fund in part because
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you want to know
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one like is this a good venture fund
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right if they've got really good
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investors in the fund then they're
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probably pretty good because they've
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generated good returns uh over the long
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run the other thing is
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that
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if your lp base and this is kind of a
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little bit of a secret if your lp base
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is mostly high net worth individuals
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they may struggle to make their capital
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commitments and fund the business or the
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venture fund over time whereas if their
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institutional investors they're less
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likely to fall through on their
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commitments and so that that's important
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because if you're a startup and the fund
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is backed mostly by individuals that
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money may not be quite as certain as if
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they were backed by large institutions
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so you know how i mentioned earlier i
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was going to talk about russian lps and
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killing deals well think about the
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current environment we're in where
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russia is invading the ukraine and all
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of kind of the things that are happening
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there so your lps matter there is a fund
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called dst global they were an early
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investor in facebook and backed by
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you guessed it russians
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so they actually had to come out
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recently and tell everybody that they no
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longer have any russian money because
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entrepreneurs were refusing to take
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their investment right so key takeaway
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here do your diligence on the vcs ask
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them about their lp composition and feel
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comfortable pushing you should know
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where the money is coming from and feel
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comfortable
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with those investors
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if this was interesting and helpful
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check out my next video where we're
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going to talk about
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whether you can invest in venture
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capital firms
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[Music]
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you
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