Before we jump into why venture capital general partners would invest in other VC funds, let’s break down some basic terminology.
Venture capital general partners are like the fund managers. They make the investments. They woo startup founders. They write the checks. They’re the ones who are the face of the fund, so they do the media interviews and take people out to coffee. They are out front.
Limited partners, on the other hand, are the money people. They’re the institutions, endowments, foundations, pension funds, and the high-net-worth people or entities that contribute the cash that the VC fund will invest.
So general partners run the fund, while limited partners invest in the fund. And perhaps surprising to some, it’s not uncommon to see general partners investing in other VC funds.
General partners invest in what they know
Probably the main reason you’ll see general partners investing in other VC funds is the investing methodology of “invest in what you know.”
If they already understand the VC landscape and likely know who the good fund managers are. And, of course, as an investor, they want to maximize their returns.
It’s all about investing in what you know and believing in your own convictions.
If they recognize someone is a really great talent, then of course they will invest in them.
General partners are in the know
One of the advantages of being a general partner is that they are privy to information that perhaps others are not.
Just in talking to other general partners and doing business together in the same world, they hear about up-and-coming companies.
It’s why you may see a late-stage general partner investing in a series A fund or a seed fund. They are essentially building the pipeline that looks promising down the road.
Part of being in the VC world is they receive letters and investment insights, which are actually quite helpful. They will often learn about what’s happening in other parts of the VC food chain through letters and insights.
General partners are building relationships
Another reason general partners will invest in other VC funds is simply about solidifying partnerships.
VCs tend to work like a syndicate where they’ll deal with certain firms over and over again. This really speaks to trust, respect and reputation.
If you find a fellow VC who is stable, who works well on the board, and someone who has the same values as you, you are going to gravitate towards doing multiple deals with that person.
This is also true for general partners who will invest in a VC fund that a former team member started on their own. Investing in their fund is a nice to way to support them, and signal that you believe in them.
That signalling is important in the VC world.