What Is a General Partner?

The investments of any venture capital fund must be managed effectively. A general partner (GP) is someone who plays an active role in handling the operations of a venture capital fund. 

The general partner definition also covers the tasks associated with managing the VC fund, such as:

·       Analyzing the startups to invest in

·       Raising capital for the fund

·       Calling the final shots on which investments to make. 

Unlike a limited partner (LP), a GP may have unlimited liability for any business debts associated with the fund. They bear the most risk and reap the highest rewards compared to their limited partners. 

GPs are highly experienced individuals with several valuable connections within the industry they operate. In a way, GPs are entrepreneurs or investors themselves. They interact with the LPs who are typically high-net-worth individuals, financial bodies, or other large institutions. General partners are highly sought after in the world of investments and charge a substantial fee for their services.

General Partner vs Limited Partner

Now that you know the answer to “What is a general partner,” It’s time to decode the limited partner vs general partner question. The greatest difference between a general partner (GP) and a limited partner (LP) is: 

A GP bears unlimited liability and has complete control over the way a fund’s operations unfold, whereas LPs bear a limited liability and don’t have much control over the fund’s operations. 

A general partner performs all the decision-making related to portfolio companies and investments. They also manage any disputes that may unfold during the lifespan of a VC fund. For their services, GPs are entitled to an annual management fee and carried interest. LPs, on the other hand, receive returns on their capital investments. Here’s a detailed answer to the general vs. limited partner question: 

General Partners:

·       Are fully responsible for the fund’s operations

·       Receive compensation in the form of an annual management fee, carry, co-investing opportunities, and fund distributions

·       Actively work with portfolio companies

·       Face unlimited liability for the debts and business of the partnership 

Limited Partners:

·       Only provide capital for the fund

·       Are passive investors who are not involved in the fund’s operations

·       Only receive gains from fund distributions

·       Are not involved with portfolio companies

·       Face limited liability based on the amount they invest 

General Partner Agreement

The partnership agreement between a general partner and limited partners spells out what both partners can and cannot do during the lifespan of the venture capital fund. Here are some of the many rules that the general partner agreement includes:

·       The rights that each partner has

·       How an individual becomes a partner or is removed from the partnership

·       The overall scope of the partners’ activities

·       How the partners can make their contributions to the fund

·       How the gains will be distributed among everyone

·       How the voting process would unfold. 

Aside from these rules, a general partner agreement outlines partnership interests. This includes the amount of partnership each partner (GP or LP) owns. An existing partnership can also be amended by adding, removing, or modifying its terms. Once the fresh agreement is enacted, the partners are required to act according to the amended terms of the new agreement. 

What Kind of Work Does a General Partner Do?

As a limited partner, when you contribute to a venture capital fund, your job is more or less complete. From there, you sit back and simply wait for your investment to bring valuable returns. But for a general partner, the opposite is true. A GP is tasked with managing the fund till the end of its lifespan, which is usually more than a decade. The main responsibilities of a venture capital GP include: 

Raising the Capital for a VC Fund

This can be a complex task, given how competitive the market continues to become. In most cases, investors contribute their money to a fund solely because of the general partner’s “star power” or track record. 

Deploying the Capital

GPs know the answer to “Which early-stage companies to put money in?” They identify the right investment opportunities, run thorough due diligence, and finally seal the deal with the best possible terms. 

Managing the VC Fund’s Operations

A general partner handles all operational tasks associated with a VC fund including:

·       Managing the fund’s tax reporting

·       Handling the financial reporting

·       Executing all administrative items. 

Boost the value of a Portfolio Company

Investors and startups alike trust GPs for their track record, network, and ability to bring out the best in their investments. Once the money has been invested, a GP constantly monitors a portfolio company’s performance. They offer direct support to startup founders whenever they need it. GPs also tap into their network to ensure early-stage businesses make relevant industry connections with customers, vendors, talent, and even new investors. This support ensures a portfolio company is always on its best performance, maximizing its value and multiplying the investments poured into it. 

Keeping the Limited Partners Updated

GPs ensure LPs stay updated with the fund’s performance by sending the latter regular portfolio company updates, performance summaries, and investor letters. They also host annual LP meetings to ensure everyone stays on the same page.

What Are the Pros and Cons of Being a General Partner?

The role of a general partner comes with its own devils and darlings. The upsides of being a venture capital GP include:

·       Absolute control over managing the fund – from selecting the team that runs it to making all investment decisions

·       High returns in the form of carried interest. According to data, an average GP makes over $634k annually. Moreover, most carried interest offers significant tax savings since they’re taxed as long-term capital gains.

·       Faster career progression. General partners who build a solid track record by investing in the right portfolio companies consistently progress toward raising bigger funds. Moreover, the longer a GP operates in the industry, the bigger (and more valuable) their network becomes. This increases their ability to raise significant capital and maximize the growth of portfolio companies. 

The downsides of being a venture capital GP include:

·       The job demands a massive commitment. Most LPs require GPs to put in 1-5% of the total value of the fund using their own money. This can become challenging when a GP is trying to raise a large fund and doesn’t have the financial capacity to commit upfront.

·       Time-consuming. Unlike limited partners who are a “passive” part of the partnership, GPs are tasked with consistent involvement. This can be challenging when a GP manages multiple funds simultaneously.

·       It can take a long time to find out how the investments pan out. VC funds come with a long feedback loop. For a GP, this is a long time to gauge their skills as a venture capitalist.

 How Are General Partners Compensated?

A venture capital general partner is typically paid a management fee and a sum in carried interest.

The management fee is a percentage of the total money that investors contribute to the VC fund. In most cases, GPs charge a management fee of 2-3%. GPs also receive a carried interest which is generally performance-based. This interest usually sums up to 20%.

 Aside from a management fee and carried interest, general partners are also entitled to additional compensation. These are in the form of co-investment opportunities, where a GP puts in their own money alongside other investments. Co-investment opportunities allow GPs to glean higher gains if the fund performs well. Finally, GPs may also be eligible for other benefits including:

·       Opportunities with portfolio companies if they offer invaluable advice and guidance when the business is in its key development stages.

·       Access to restricted stock units

 What Makes a Good General Partner?

As such, there is no specific blueprint for being an ideal venture capital general partner. The world of venture capital is risky and unpredictable. The best GPs often follow certain best practices that help them extract valuable gains within high-risk, high-reward ventures. Some of these include:

·       A thorough understanding of their unique strengths and investment thesis

·       Having the potential to tell compelling stories to potential investors

·       Being as transparent and forthcoming with the LPs as possible, consistently sending them informative updates, and nurturing strong relationships with everyone they work with

·       Building a solid network of customers, talent, vendors, and other investors.