A tiny thing that could do a lot of good for diversity of fund managers (if others join): for our next fund, I’m not committing to any level of “GP commit” and will do the work to explain to LPs why that’s okay. Let me explain
GP = General Partner = the folks who actually do the investing and get the upside of the fund. Is customary in funds like VC to require GPs to commit +/- 2% of the total fund themselves. Want to raise a $100m fund? ~$2m of your own cash is table stakes
Early stage investing is long-term illiquid asset class, putting millions into your own fund requires a $10m+ net worth *minimum* to make any sense. This is a HUGE barrier to aspiring managers who don’t come from wealth.
It’s customary because it’s supposed to “align incentives” — traditionally GPs were of course already rich white dudes, so they need to put skin in the game to manage OPM (other people’s money). 2-3% was deemed reasonable to chip in to keep ‘em honest.
But it’s an idea past it’s expiration date. The best prospective managers are not already enormously wealthy and a salary cap + the opportunity cost of startling and running a fund is more than enough skin in the game (believe me!)
The hilarious part is for the particularly well-networked it isn’t a problem because there are Silicon Valley insider banks that will finance your GP commit with debt against your future stream of management fees (literally no skin in the game for the in-crowd)
The idea only persists because the big boy VC funds still do it and other funds don’t have the clout to convince LPs it should be cast aside. Doubt my stand will matter but would be an awesome, effortless, small win if other GPs would publicly join in killing their GP commit 🙌
Small clarification: "no commits" is not the answer here, rather the more nuanced "commits should be optional, not an arbitrary barrier emerging managers, and 'skin in the game' should be responsive to GP net worth and life situation"
