🤝 This week’s edition is sponsored by Alto

Alto enables investors to use self-directed IRAs to invest in startups and private market opportunities within a tax-advantaged retirement account. Learn how angel investors use Alto to access private investments and diversify beyond public markets.

📰 Today's topic: Why your best shot as a small LP is backing Fund 1

A common question I get from angels is "How do I start investing as an LP in venture funds?"

(Note, an LP is a Limited Partner - someone who invests capital into a fund.)

To answer that, there's an SEC rule that aspiring LPs should fully understand:

An accredited investor fund can only accept 99 investors.

This. This is what quietly determines who builds wealth as an LP, and who gets locked out.

Let's do some quick math

Say a fund manager is raising a $20M fund. 

With only 99 LP slots available, the average check size needs to be north of $200k. And for individual investors, asking them to write a $200k check into a single fund is a lot.

That’s exactly why so many emerging managers end up with smaller funds. 

You simply can't round up an unlimited number of $5k or $10k checks when you only have 99 spots to fill.

So what happens in practice?

Most new fund managers start by accepting smaller checks to build momentum. (Hustle Fund, for example, started Fund I by taking $25k checks.)

But at a certain point, the manager has to start turning away small checks to save slots for bigger ones.

A fund manager might actually turn away a $100k check, or even a $250k one, because they're holding out for a $1M+ commitment to fill one of their last few slots.

Why the deepest pockets always win

Almost by definition, the wealthiest investors will always get access to nearly any fund. 

Fund managers need those large checks to fit under the 99-slot cap. So, smaller investors get squeezed out. 

Since smaller investors also tend to be less wealthy, you get this compounding flywheel where the rich keep getting access to the best opportunities and everyone else doesn't.

Here's where it gets tactical for you

If you're sitting on $5k and thinking about becoming an LP, your best shot is getting into someone's Fund 1. 

Before they have a brand or a waitlist. 

Before their minimum check size gets pushed up.

Why? Because on Fund 2, the GP is almost certainly going to increase the fund size. And when the fund size goes up, the average check needs to go up with it. 

If you can still only afford a $5k check, the only way you're getting in is if you already have that relationship built from Fund 1.

That's your foot in the door. Be there first.

Bottom line

Yes, it might be riskier because you're backing someone who has no track record as a fund manager to point to.

But that's also why there's a slot for you at all. (And until the SEC changes things, the game is what it is.)

So if you're an angel looking to get LP exposure, don't wait for the hot fund everyone's talking about. 

Find the hungry emerging manager nobody knows yet, and get in early.

– Brian from Angel Squad

📕 Startup term you should know

What’s a LIQUIDITY EVENT?

This is when you can finally turn your startup equity into actual cash or something you can easily sell. It happens through an acquisition (someone buys the company), a merger, a wind down (shutting down), or an IPO (going public). People also call these "exits."

My insider scoop: According to PitchBook data, it now takes 7-10+ years to exit for VC-backed companies - way longer than the old 4-5 years. That's why secondary markets and partial liquidity events (like tender offers) have become so important. They give investors a chance to cash out before waiting for a decade or more.

Overheard in SF…probably

“We're not a Juicero situation. Our product actually works. It's just that nobody wants to pay $400 for what it does.”