What is the Role of a Limited Partner?

A limited partner serves as the financial backbone for the venture funds they invest in. The role of a limited partner (LP) in a venture capital fund typically varies from fund to fund. Some general partners (GPs) may actively involve LPs on a regular basis, whereas others may simply update LPs from time to time. Generally speaking, LPs have three primary roles:

·       Deploying their capital in the VC fund

·       Understanding all provisions in the fund’s agreement

·       Reviewing updates about the fund

Limited partners generally have no control over the fund’s operations and don’t engage with portfolio companies they invest in. They have limited liability in venture capital partnerships. This usually protects them from significant risks associated with VC investments. 

What is a Limited Partner?

What is a limited partner? Limited partners (LPs) are individuals or institutions that invest in venture funds. They deploy a portion of their money during the beginning of the fund. The GP then “calls” on additional investment from LPs as the fund’s lifespan progresses. In some cases, a general manager can call all capital upfront. 

Once the fund generates gains, LPs receive dividends based on the percentage of capital they have invested. Usually, there is an 80/20 division of the gains between limited partners and general partners. 80% goes to the LPs and 20% goes to the GP in the form of carried interest. 

There are several types of limited partners. The primary types of LPs in a VC fund include high-net-worth individuals, pension funds, family offices, and sovereign wealth funds. Different LPs have different risk appetites, require certain types of agreements, and look for specific investment requirements. 

High-Net-Worth Individuals (HNWIs)

A high-net-worth individual is someone who possesses liquid assets over $1 million. These investors often seek to expand their wealth through mid or long-term investments. For venture funds, HNWIs can deploy capital worth $100k to $1 million throughout a fund’s lifespan. These investors often invest in early-stage companies and prefer investments that come with high risks and higher returns.

Family Offices

Family offices can act as limited partners for both established and early-stage VC funds. These offices manage the finances of high-net-worth families. Family offices generally commit a minimum of $500k to venture funds. 

Sovereign Wealth Funds and Pension Funds

Pension funds and sovereign wealth funds offer significant contributions to venture capital firms. Sovereign Wealth Funds are owned by the state. Their main goal is to benefit a country’s leadership or citizens. Sovereign wealth funds provide significant monetary resources. Their contributions often help stabilize the world of venture capital. 

Who Qualifies for Being a VC Limited Partner?

Based on the way a venture fund is structured, an individual wanting to be a limited partner must either be:

·       A qualified purchaser

·       An accredited investor 

Being a qualified purchaser comes with several requirements such as having a minimum of $5 million of your own money and/or having a minimum of $25 million of other qualified purchasers’ money in investments. 

Becoming an accredited investor comes with several requirements, including:

·       Having a Series 65, 7, or 62 license

·       Having a net worth that goes beyond $1 million (this should not include the value of a primary residency)

·       Having an income of more than $200k for the past two years

·       Having a joint income of 300K for the past two years

·       Having reasonable expectations of reaching an income of 200k in the current year 

How Do Limited Partners Make Money?

Limited partners commit to supplying capital in funds that may or may not see returns after the fund’s lifecycle. An LP may either make a 10-fold gain from their investment or even lose everything they invest. 

If a fund does bring results, it can take more than seven years to acquire the profits. The process of sharing the returns of a fund with LPs is known as “distribution.” Certain VC funds may distribute funds at various milestones, whereas others may re-invest the gains. 

Once the fund’s life cycle is complete, the gains are distributed among the LPs and GP in an 80/20 ratio. The amount of money an LP will receive from this gain would depend on the proportion of their investment. 

What are the Benefits of Being an LP?

Aside from a substantial share from the total gains, LPs enjoy several benefits. Some of the benefits of becoming a limited partner include:

·       Network expansion. Investing in a VC fund allows a limited partner to develop relationships with other investors. This can sometimes help them gain access to valuable investment opportunities in the future.

·       Access to data. The general partner provides regular updates on portfolio companies that an LP has invested their funds in. An LP can even negotiate additional contractual rights to gain more information on early-stage companies.

·       Portfolio diversification. When LPs start their VC investment journey, they gain access to a variety of portfolio companies. This helps them deploy investments in a way that expands returns and minimizes risks across various ventures.

·       Potential high return. Collaborating with the right VC firm can increase an LP’s chance to acquire attractive returns. After all, reputable VC firms have a proven track record of building successful portfolio companies.

·       Limited liability. Unlike general partners, LPs enjoy limited liability for the fund’s obligations and debts. 

General Partner vs Limited Partner

What is the difference between a general partner and a limited partner? 

General partners are fully responsible for managing the fund’s daily operations – right from deciding which companies to invest in to hiring the right team. In exchange for their services, GPs receive compensation in the form of management fees, carried interest, and fund distributions. GPs are also actively involved with the portfolio companies. Finally, a general manager faces unlimited liability for debts and business of the fund. 

LPs are passive investors who are not involved in the fund’s day-to-day operations. Their primary role is to contribute capital to a venture fund. Once they deploy their money, they can simply sit back, track the progress of the portfolio company they invest in, and wait for their investment to bring valuable gains after 7-10 years. Unlike a GP, an LP’s liability is limited to the amount they’ve invested in. 

Let’s look at the general partner vs. limited partner question based on the roles they play in a venture fund. GPs are responsible for:

·       Establishing and managing the VC fund

·       Raising capital for the fund from different sources

·       Making investments in portfolio companies

·       Managing investments

·       Constantly sending updates to LPs 

In addition, general partners deploy some of their money in a VC fund when LPs expect a “GP commitment.” LPs, on the other hand, deploy capital into the fund and perform other duties such as:

·       Committing capital to VC funds

·       Understanding the agreement between GP and LPs

·       Sending capital on time

·       Exercising their right to vote on certain actions related to the venture fund (this can vary with different funds) 

Why Would an LP Want to Invest in DG Capital’s Funds?

Limited partners are the financial foundation of every successful VC investment. While the world of venture capital comes with substantial risks, the cannabis sector is one investment area where the rewards outnumber the risks. At Dispensary-Growth Capital, we unlock a combination of strategic capital infusion and unparalleled SEO magic for dispensaries we team up with. Why invest in Dispensary-Growth Capital, you ask? Here’s your answer:

Opportunity to Support Innovative Cannabis Dispensaries

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Trust

We deeply understand three of the most critical things about the cannabis sector: stringent laws and regulations surrounding cannabis, competitive market landscape, and changing customer behavior. Our dual expertise in capital acquisition and digital marketing helps us make strategic decisions to turn a small dispensary into an industry giant. 

Potential for Substantial Financial Gains

In the cannabis sector, there is rarely a shortage of customers. Unlike other businesses, dispensaries don’t have to actively “seek” customers. Customers simply come to them. This is where the scope of investing in growing cannabis dispensaries lies.  

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We have mastered the art of bringing customers to a website. What makes us truly stand out is our niche-centric SEO expertise. We craft digital strategies solely for cannabis dispensaries. We bring our digital muscle to help growing dispensaries stay ahead of the curve while scaling their business quickly and effectively. Investing in Dispensary Growth Capital doesn’t just bring substantial financial gains. It unlocks countless investment opportunities in the future. Let’s create success stories together. Contact us today!