A general partner (known as a "GP") is a manager of a venture fund.
GPs analyze potential deals and make the final decision on how a fund’s capital will be allocated.
General partners get paid through management fees, carried interest, and distributions from the fund.
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Let’s say a venture capital fund does well and provides a 20x return on $5M in capital that it raised. The GP (general partner) typically pockets $20M—a whopping 20% of the $100M in returns. Meanwhile, the fund’s investors (known as limited partners or "LPs") split up the remaining $80M.
Outsized rewards, however, come with responsibilities. In this article, we'll break down what a GP does to earn the big bucks, how they’re compensated, and some of the risks they take on when running a venture fund.
What is a General Partner?
A GP is a manager of a venture fund. They may be a partner at a large VC firm like Sequoia, or an individual investor using AngelList. Like fund managers in other arenas (stocks, mutual funds, crypto, etc.), they analyze potential deals and make the final call on what to do with the money they manage.
GPs of venture funds generally have “skin in the game.” They invest their own money into their fund.
GPs also have a lot of responsibilities. Two main responsibilities are raising money from investors (called limited partners or “LPs”) and finding quality deals.
What Work Does a General Partner Do?
When you invest money into a venture fund as an LP, your work is more or less done. You sit back and hope for returns one day. The GP may ask for advice from time to time, and you may occasionally express your opinion on deals, but for the most part, you’re a passive investor.
For GPs, the opposite is true. A GP is ultimately responsible for everything that occurs throughout the fund’s lifespan (which is typically 10 or more years).
These are the main responsibilities of a GP:
Raising the fund. This can be an extremely challenging task, particularly as the venture capital space gets more and more competitive. In many cases, LPs invest because of the track record and “star power” of the GP.
Effectively deploying the fund’s capital. This means identifying the best investment opportunities, performing due diligence, and closing the deal with the most favorable terms possible.
Maximizing the value of the portfolio companies. Once investments are made, GPs regularly monitor the performance of portfolio companies and often provide direct support to founders. Leveraging their network to help these companies make relevant industry connections—whether potential customers, talent, or suppliers—is a common way GPs support founders. GPs can also offer advice and help raise follow-on funding as needed.
Making follow-on investments. GPs must decide whether to follow-on in subsequent rounds of financing or be diluted. This decision is often based on whether or not the GP has secured pro rata rights.
Keeping LPs updated on the fund’s performance. GPs send regular investor letters, portfolio company updates, performance summaries, and often host annual LP meetings. GPs may check in more regularly with high-priority LPs to nurture those relationships.
Managing Fund Operations. The GP is responsible for ensuring that the Fund’s tax reporting, financial reporting, and other administrative items are executed.
Building the team. It’s common for a GP to hire a team of people to analyze deals and help operate a fund.
How Does a General Partner Get Paid?
GPs can get paid in three ways:
Fund management fees. Just like many mutual funds, there’s usually an annual fee charged on the fund’s total commitments. A typical management fee is 2%. Note that the fee is intended to both compensate GPs for their time and be used to pay for operational costs (like staff salaries, office space, legal, taxes, and travel).
Carried interest. This functions as a performance bonus for the GPs when the fund produces returns. Carried interest is a percentage of the fund’s profits that goes to the GPs—typically 20%. GPs receive their carried interest only after LPs invested capital has been returned to them. Carried interest may also be subject to hurdle rates (minimum returns a fund must make before carried interest can be paid out) or claw-back provisions (in which LPs can legally force the GPs to personally pay them back if the investments decline in value after the GPs have taken their carried interest payouts). For a detailed guide on how carried interest works, check out our guide to carried interest.
Distributions from investments. Because GPs usually invest their personal capital in the fund, they can also profit from the distributions alongside the fund’s LPs.
General Partners vs. Limited Partners
The vast majority of people in the venture ecosystem aren’t full-time fund managers, but rather LPs investing in a GP’s fund.
On the other hand, it’s hard to get started as a GP. You need a founder network and expertise to find good deals, a network to find investors, and often the ability to travel. GPs generally have experience in the industries they invest in and often develop a unique investment thesis.
Here’s a breakdown of the differences between GPs and LPs:
The Advantages and Disadvantages of Being a General Partner
GPs can enjoy plenty of upside:
Substantial returns from successful investments thanks to carried interest. For example, according to a 2018 survey of over 200 venture capitalists, the average GP is expected to make $634k for the year. As a bonus, most carried interest is also taxed as long-term capital gains, which creates significant tax savings.
Almost total control over running the fund—from investment decisions to the team that operates it.
Upward career progression. GPs who amass a strong track record of investing in successful companies often move up to raise bigger funds. Further, the longer you stay in the industry, the bigger the network you can build—which also matters in raising capital and even helping portfolio companies scale.
But there are downsides, too:
It’s time-consuming. Unlike LPs, who can “passively” invest in venture capital funds, GPs must be actively involved. While it’s possible for GPs to manage multiple funds at the same time, they must be cautious of spreading themselves too thin.
A long feedback loop. It can take 5-10 years to find out how your investments pan out. This means the feedback loop to gauge your skill as a venture capitalist is very lengthy—which can be uncomfortable for many.
Large GP commitments. LPs typically expect GPs to contribute 1-5% of the fund's total size using their own money. If the GPs are raising a large fund, they may not have that kind of cash to pay their commitment up front. When this happens, they can either get a personal loan from a bank or have the fund offset a corresponding amount of management fees in lieu of a commitment.
How Can You be a Good General Partner?
There is no blueprint for being a good GP. Like other arenas, investing in startups is risky and unpredictable. Venture funds follow power-law returns, where the best investments generally return exponentially more than all other investments. At the same time, investors must be willing to wait a decade or more to see if their deals pan out. A lot can happen in that time—and randomness can play a significant role.
That said, there are a few best practices you can follow to increase your chance of success as a GP:
Deeply understand your investment thesis and unique strengths. You—and your prospective LPs—need to know what separates you from the pack. Whether it’s your industry connections, track record, deal pipeline, or investment strategy, be clear about what your strengths are.
Hone your storytelling capabilities. Much like how founders need to tell a compelling story to potential investors, GPs must also be able to present a convincing narrative to prospective LPs. This goes hand-in-hand with the previous point.
Be as forthcoming as possible with your LPs. Just because the money has been raised doesn’t mean the LPs can be neglected. Given the long lifecycle of a venture capital fund—and the fact that strong LPs may be counted on to support subsequent funds—GPs should nurture strong bonds with their LPs. A simple way to do that is by providing consistent informative updates to LPs while remaining as accessible as possible.
General Partners: A Vital Component of the Venture Capital Ecosystem
GPs represent the public face of venture capital, liaising with LPs and founders as they manage long-term startup investments. They can reap outsized rewards—but shoulder greater risk and responsibility in return.
If you’re ready to become a GP, consider launching a fund on AngelList.
To learn more about how to be an AngelList GP, visit our website.
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