LP/GP Dynamics in Venture Capital

· 15 min read
venture-capital finance

The relationship between limited partners and general partners is the foundation of venture capital. Everything in the asset class (fund formation, deal sourcing, portfolio construction, exits) flows through that relationship. But the LP/GP dynamic is changing, and in ways that matter for anyone who participates in venture, whether you’re writing checks, allocating capital, or building a company that takes venture money. When I was Head of Data Science at Aumni, I spent years looking at the data that sits underneath these relationships, and the patterns were often surprising. The way LPs evaluate emerging managers, the growing importance of liquidity paths, the underappreciated power of co-investor networks, and the push for standardization across private markets are all reshaping how venture capital actually works on a day-to-day basis.

This post is for informational and educational purposes only. Nothing here is legal, tax, or investment advice. Consult qualified professionals before making any decisions based on this content.

The Emerging Manager Differentiation Problem

The emerging manager space in venture capital has gotten crowded. Most emerging managers say roughly the same things. They have “proprietary deal flow,” they add “unique value” to portfolio companies, and they have a “differentiated thesis.” LPs hear this pitch dozens of times a quarter. The managers who actually stand out are the ones who can back up their claims with specifics, and LPs have a role to play in raising that bar.

Saying you invest in “AI companies” isn’t differentiation when hundreds of other funds say the same thing. Pointing to a specific technical background, operational experience, or network advantage that gives you an edge in a defined corner of the market is much more compelling. For first-time funds, the challenge is particularly acute: without a track record, you’re asking LPs to trust your judgment, your network, and your ability to source and win competitive deals.

Fund Size and Portfolio Construction

Fund size plays a bigger role in differentiation than many emerging managers realize. For funds under $25 million to $50 million, getting institutional traction is genuinely difficult. Most institutional LPs have minimum check sizes that make it impractical to invest in very small funds, and the operational overhead of diligencing a $20 million fund isn’t much different from diligencing a $200 million fund.

That said, smaller fund sizes can actually be an advantage if the manager leans into it. Smaller funds can target earlier stages, move faster on deals, and potentially generate outsized multiples. The key is constructing a portfolio that matches the strategy. LPs can smell a mismatch between fund size and stated approach from a mile away.

Portfolio construction is where many emerging managers stumble. Having a clear, well-reasoned framework for how many investments you’ll make, what your reserve strategy looks like, and how you think about concentration versus diversification signals a level of thoughtfulness that LPs value. It’s one thing to say you have a thesis. It’s another to show how that thesis translates into a specific number of investments at specific stages with a specific capital deployment schedule.

The Path to Institutional Readiness

Institutional readiness comes down to strong portfolio analytics and operational professionalism. You don’t need a massive back office from day one, but you do need systems in place to track your portfolio accurately, report consistently to LPs, and demonstrate that you’re running a fund rather than just making investments.

The advice from experienced allocators: sit down and map out the diligence process before you ever take a meeting with an institutional LP. Know what they’re going to ask for, have the answers ready, and present them clearly. Managers who treat LP diligence as a check-the-box exercise tend to underperform in fundraising compared to those who treat it as an opportunity to demonstrate operational chops.

Establishing proper governance early also signals seriousness. Setting up an LPAC, having clear conflict-of-interest policies, and building consistent reporting protocols separates managers who are building durable franchises from those who are just trying to raise a fund. Neither is glamorous work, but LPs notice.

What LPs Can Do to Improve the Ecosystem

LPs have more influence over the quality of the emerging manager ecosystem than they sometimes realize. By clearly communicating what they’re looking for, providing constructive feedback to managers who don’t make the cut, and being willing to back managers who show genuine differentiation even when the track record is thin, LPs raise the overall quality of the space.

The alternative is a market where every emerging manager tries to look like a miniature version of an established firm. The best emerging managers bring something genuinely new to the table, and the best LPs are the ones who can recognize and reward that.

Liquidity Paths for Early Investors

For most of venture capital’s history, early-stage investing meant locking up capital for a long time. The idea that founders or early investors would have meaningful liquidity before an IPO or acquisition was uncommon, and honestly, a bit frowned upon. That has changed significantly. Today, even at the earliest preferred financing rounds, early investors can seek and obtain liquidity through secondary sales, tender offers, and structured distributions.

The simplest driver is that venture fund lifecycles have gotten longer. Companies are staying private for more years than they used to, which means investors are waiting longer for returns. When the average fund life stretches to 10 or 15 years, the pressure to create some form of interim liquidity becomes real. For founders and early employees, partial liquidity lets them diversify their personal wealth and sometimes make better long-term decisions about the company because they’re not entirely dependent on the exit for financial security.

The Main Liquidity Mechanisms

Secondary sales are the most straightforward: an existing investor sells some or all of their stake to a new buyer through a dedicated secondary fund, a broker, or a direct negotiation. The transaction usually requires company approval, and existing investors may have a right of first refusal.

Tender offers are more structured. The company facilitates a process where eligible shareholders can sell shares at a predetermined price, more common at later stages when the company has significant value and wants to give early stakeholders a way to take some money off the table.

Structured distributions happen at the fund level. A GP might sell positions in one or more portfolio companies and distribute the proceeds to LPs, or restructure the fund to provide interim liquidity.

From the LP perspective, the key question is whether the GP is managing the fund’s liquidity profile thoughtfully or reactively. Are secondary sales happening as part of a deliberate portfolio management strategy, or because the GP needs to show returns? That distinction matters a lot for how LPs evaluate the underlying quality of the fund.

The Case for Creating Liquidity

When founders and early employees can take some money off the table, they may actually become better stewards of the company. The pressure of having 100% of your net worth tied up in a single illiquid asset can lead to short-term thinking or unnecessary risk-taking. Partial liquidity reduces that pressure.

Secondary markets also provide price discovery. When investors trade shares between themselves, you get real-time information about how the market values a company, which is useful for portfolio valuation, fundraising, and strategic planning. Many sophisticated LPs now ask about a firm’s secondary strategy as part of their diligence process, treating it as a signal that the GP understands portfolio management rather than just buying and holding indefinitely.

The Case for Caution

Information asymmetry is the biggest concern. In secondary transactions, the seller often knows more about the company’s prospects than the buyer, which creates an adverse selection problem: if early investors are eager to sell, does that tell you something about the company’s trajectory?

Price opacity compounds this. Unlike public markets, there’s no central exchange for secondary venture shares. Transactions happen in bespoke bilateral deals, and pricing terms are rarely made public. Misaligned incentives can also creep in: if founders or early investors can cash out easily, it may reduce their motivation to work toward a big exit, introducing the possibility that different stakeholders are optimizing for different outcomes. Secondary transactions can also introduce new investors to the cap table who the company and existing investors didn’t choose, adding governance friction and cost.

Finding the Right Balance

Companies and funds that approach secondary activity with clear policies, fair pricing mechanisms, and appropriate governance tend to get the benefits without most of the downsides. The key elements include maintaining information parity as much as possible, setting clear windows and processes for secondary activity, ensuring the company retains control over who ends up on the cap table, and communicating openly with all stakeholders.

For LPs evaluating GPs, the question to ask isn’t “do you do secondaries?” It’s “how do you think about secondaries, and what’s your framework for when they make sense?”

Co-Investor Networks as a Strategic Asset

Most investment firms have hundreds of co-investors in their network at any given time. That’s a lot of relationships, a lot of shared deal history, and a lot of data that typically sits in spreadsheets, CRM systems, or someone’s head. The firms that get systematic about understanding their co-investor network tend to make better decisions about deal sourcing, syndication, and portfolio construction.

The data backs this up. Capital Dynamics found that, for funds launched between 1998 and 2016, 60% of co-investment funds delivered a higher net IRR compared to single-sponsor funds. That’s a meaningful finding and suggests that the syndication itself (who you invest alongside) has real impact on returns.

Deal Sourcing and LP Development Through Your Network

Your co-investor network is a gateway to involvement in the best deals. If you’ve co-invested alongside a firm three or four times with strong outcomes, there’s already a foundation of trust and working familiarity. When that firm sees a new deal that fits your thesis, you’re more likely to get an early look. Conversely, you can refer deals to co-investors whose expertise complements yours, strengthening the relationship in both directions.

This also works for LP development. Co-investors who have had good experiences investing alongside you can refer you to LPs drawn to your thesis, and a warm introduction from a respected co-investor is worth more than any cold outreach. For emerging managers especially, building a reputation as a good co-investor can be as valuable as building a direct track record.

Identifying Your Best Co-Investor Relationships

You can identify which co-investors you’ve earned the highest returns alongside by looking at your portfolio on a deal-by-deal basis, attaching current valuations, multiples, and exit outcomes to each deal, and then sorting by the highest multiples. You start to see patterns: maybe you perform best when investing alongside firms with deep technical expertise, or perhaps your strongest returns come from deals where a specific co-investor led the round.

The most useful co-investor analysis goes beyond listing names. At the company level, you want to understand who led the round, what the ownership breakdown looked like, how involved each investor was in supporting the company, and how the investment ultimately performed. This lets you answer questions like: “When Firm X leads and we follow, what are our average returns?” or “In deals where we have three or more co-investors, do we see better or worse outcomes than deals with just one or two?” These aren’t hypothetical questions. They have answers in your data.

With that context, you can amplify network effects to lower your risk without lowering your return. When you invest alongside partners who complement your strengths and have a track record of good judgment, you’re effectively getting additional diligence and operational support without paying for it. Having a clear picture of your existing co-investment history also helps you be more intentional about which new relationships to develop and which existing ones to deepen.

Investors who treat their co-investor network as a strategic asset, rather than just a list of people they’ve done deals with, tend to source better deals, construct stronger syndicates, and ultimately generate better returns. The data is already in your portfolio.

The Push for Standardization in Private Markets

Private capital markets have a standardization problem. Unlike public markets, where reporting formats, data definitions, and transaction structures are largely uniform, private markets remain fragmented. Every fund reports a little differently. Every deal document is structured a little differently. Every firm tracks portfolio data in its own way. This makes comparison, analysis, and transparency harder than it needs to be.

The case for standardization comes down to transparency and efficiency. LPs investing across multiple funds want to compare performance, terms, and risk profiles on an apples-to-apples basis. When every GP reports using different metrics and formats, aggregating that information into a coherent portfolio view is a time-consuming, error-prone exercise. On the efficiency side, the lack of standardization means enormous amounts of manual work go into extracting, normalizing, and reconciling data from deal documents.

This is directly relevant to the LP/GP relationship. When an LP is evaluating a GP’s fund, one of the things they’re implicitly assessing is how much work it will be to integrate that fund’s data into their portfolio management systems. GPs who report in standardized, machine-readable formats make life easier for their LPs, and that counts for more than many GPs realize.

Where the Industry Is Making Progress

Real progress is happening, driven by a combination of industry organizations, technology platforms, and forward-thinking firms. One notable example is the NVCA’s Enhanced Model Term Sheet, produced through large-scale analysis of thousands of transactions, which contains over 150 data points detailing the usage and frequency of specific terms. This gives everyone in the ecosystem a shared reference point: when you’re negotiating a deal, you can see how frequently a particular provision (like redemption rights, pay-to-play provisions, or registration rights) appears at different stages. That kind of benchmarking data was virtually impossible to compile before documents were analyzed at scale.

Standardization ultimately depends on technology that can take unstructured information and make it structured. The typical venture deal produces a stack of legal documents with economic terms and legal provisions buried throughout. Extracting that information at scale requires a combination of natural language processing, tabular data tools, and human review. Legal documents have enough variation and nuance that pure automation misses things, but the volume is too high for purely manual review. A human-plus-AI approach has proven more reliable than either extreme.

What Standardized Data Enables

When you have structured, standardized data extracted from deal documents, several things become possible. Benchmarking becomes meaningful: you can compare your fund’s deal terms against market norms at each stage, seeing whether the protections you’re negotiating are typical or unusual. Portfolio monitoring gets better, because instead of manually tracking provisions across dozens of investments, you can see your entire portfolio’s economic and legal terms in a single view. Reporting quality improves across the board, benefiting everyone from the fund administrator preparing quarterly reports to the LP evaluating performance across their venture allocation.

Market research also becomes data-driven rather than anecdotal. Instead of relying on what partners heard at a conference, you can look at what’s actually happening across thousands of transactions. One of the most common reactions from investors seeing this data for the first time was surprise at how different the actual market norms were from their assumptions.

The Remaining Challenges

Adoption is uneven. Larger firms and institutional investors tend to embrace standardization because they feel the pain of inconsistency most acutely. Smaller firms may not see the benefit, or may lack the resources to change their processes. There’s also a natural tension between standardization and flexibility: every deal is different, and investors and companies value the ability to customize terms. The right approach is probably standardizing the data structure and reporting format while preserving flexibility in the actual terms. Data quality remains a concern too, since standardized extraction is only as good as the underlying documents and the accuracy of the processing.

Despite these challenges, the direction is clear. Private markets are moving toward more standardization, more transparency, and more data-driven decision-making.

Tying It All Together

These four themes are connected through the LP/GP relationship. An emerging manager who differentiates effectively earns LP trust, which enables thoughtful liquidity strategies. A strong co-investor network improves deal quality and returns, making it easier to attract and retain LPs. And standardization is the infrastructure that makes all of this more transparent and efficient.

The firms that understand these dynamics as an interconnected system, rather than isolated problems to solve, are the ones that build durable franchises. If you’re an emerging manager trying to raise a fund, LPs are evaluating all of these dimensions simultaneously. If you’re an LP building a venture portfolio, your feedback, expectations, and willingness to support differentiated approaches shape the quality of the entire ecosystem.

The old model, where a GP raised a fund, made investments, and showed up ten years later with (hopefully) a good return, is giving way to something more dynamic. LPs want more transparency, more data, and more engagement. The data is already there to support better decisions on both sides of the relationship. The question is whether people are willing to use it.

Further Reading

Some of the data and analysis in this post originally appeared on the Aumni blog, here, here, and here.