5 Critical Differences Between GPs vs LPs In Venture Capital!

In the dynamic world of Venture Capital (VC), General Partners (GPs) and Limited Partners (LPs) play different yet interdependent roles. They are both vital to the success of venture capital funds like the Neon Fund.

So what are the differences between GPs vs LPs in Venture Capital?

Let’s start with what the defined role of a General Partner is in a Venture Capital Fund.

GPs are the driving force behind the fund. They act as the fund managers who are actively engaged in the day-to-day operations of the fund.

They are also responsible for sourcing investment opportunities, conducting due diligence, negotiating deals, and providing strategic guidance to portfolio companies.

In return, GPs receive a management fee for their services and a share of the profits, known as “carried interest”.

On the flip side, in a business partnership, what is the role of a Limited Partner in a VC Fund?

LPs are the investors who provide the capital that fuels the fund’s investments. They commit their capital to the fund. They also rely on the expertise and insights of the GPs to generate attractive returns on their investments.

6 Reasons Why You Should Become A Limited Partner At A VC Fund

In this article, we will dive deep into the difference between GPs vs LPs in the venture capital landscape, and why understanding these distinctions is crucial for creating long-lasting partnerships in the VC industry.

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5 key differences between being GPs vs LPs

1. Role & Involvement

GPs are actively involved in managing the venture capital fund, making investment decisions, and taking board seats in portfolio companies.

They are responsible for sourcing deals, conducting due diligence, negotiating terms, and providing strategic guidance to portfolio companies.

GPs also manage the fund’s operations, including reporting to LPs and ensuring compliance with legal and regulatory requirements.

In contrast, LPs are passive investors who provide the capital for the fund. However, they have no day-to-day control or involvement in the fund’s operations.

They typically invest in multiple funds to diversify their risk and rely on GPs’ expertise to make informed investment decisions, especially in challenging funding landscapes.

2. Risk Appetite

While GPs are typically more comfortable with risk and are responsible for identifying investment opportunities, some LPs, like pension funds, tend to be more risk-averse.

This difference in risk appetite can impact the decision-making process and the investment strategy of the fund.

LPs may also have different risk tolerances based on their specific investment objectives, such as social impact, financial returns, or strategic alignment with their core business.

GPs need to balance this risk-return ratio of their investments to meet LPs’ expectations for returns while also ensuring the fund’s long-term sustainability.

This difference in risk appetite can lead to tension between GPs and LPs, requiring open communication and collaboration to match interests and manage expectations.

3. Relationship Dynamics

The relationship between GPs and LPs is based on mutual trust.

GPs need to manage the relationship proactively to ensure a successful and profitable partnership. This is because the average venture partnership can last longer than a decade.

In fact, keeping this information in mind is essential before joining a VC fund in any capacity!

Find The Neon Show’s Conversation with Ashish Fafadia, Partner at Blume Ventures below:

This relationship is built on regular reporting, meetings, and updates on the fund’s performance, investment strategy, and portfolio companies.

LPs rely on GPs’ expertise and experience to make informed investment decisions. GPs rely on LPs’ capital to fund their investment strategy.

4. Expectations

LPs expect financial returns equal to the risk taken, but they may also have additional expectations based on their strategic objectives.

For instance, corporate strategic investors may seek deal flow in sectors aligned with their business, while Development Finance Institutions (DFIs) focus on driving growth and development in underserved sectors.

LPs may also have expectations around social impact, environmental sustainability, or other non-financial metrics.

GPs, on the other hand, have expectations from their LPs, which can vary based on the type of investor and the relationship dynamics.

For instance, GPs may expect LPs to commit their capital for the fund’s duration, provide timely feedback and input on investment decisions, and support the fund’s strategic vision and objectives.

5. Liability Between GPs vs LPs

GPs typically face unlimited personal liability in the partnership. This means that if the venture incurs debts or legal claims that exceed its assets, GPs’ personal assets can be used to fulfill these obligations.

Their unlimited liability reflects their active involvement in managing and operating the partnership, holding them directly accountable for its financial health.

In contrast, LPs enjoy protection from personal liability beyond their investment in the partnership.

Their liability is limited to the amount of capital they have contributed. This shields their personal assets from claims against the partnership.

This limited liability is a result of their passive role. LPs do not participate in the day-to-day management or decision-making processes of the partnership.

Thus, they are not held personally responsible for its debts or liabilities beyond their initial investment.