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Before committing to a venture fund, an LP should be able to explain how the strategy fits its portfolio, who will make and manage the investments, how returns and risks are measured, what the fund documents permit, and whether the LP can meet the fund’s obligations over its life. Ask the GP for specific examples and supporting records—not just a persuasive pitch—and verify material answers against the LPA, offering documents, side letters, and independent evidence.
A venture-fund commitment is a long-term investment decision, not simply a vote of confidence in a manager. The SEC’s Investor.gov explains that private-fund investors may need to hold an investment for several years before realizing a return and typically face limitations on withdrawals; the exact restrictions depend on the fund documents. Review the SEC’s overview of private equity funds, then check the specific fund’s terms.
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Use a structured due diligence questionnaire to ensure consistent coverage, but treat it as a starting point for tailored questions and follow-up. ILPA describes its DDQ as a standardized framework for key areas of inquiry, while PRI notes that a questionnaire cannot replace dialogue. ILPA’s Due Diligence Questionnaire was revised on November 1, 2021, and PRI’s venture-capital responsible-investment DDQ is dated November 15, 2022.
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Ask the GP to describe the fund’s thesis in operational terms: the target stage, sectors and geographies; the kinds of companies it will avoid; and how the proposed strategy differs from the manager’s prior fund. Then test whether the portfolio construction makes sense for that thesis.
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- How many initial investments does the GP expect to make, and how much capital is reserved for follow-on investments?
- What ownership levels and exposure assumptions underlie the fund’s target outcome?
- How are opportunities sourced, evaluated, approved and supported after investment?
- What market or portfolio developments could cause the GP to change its strategy or construction?
Ask for the investment process and examples that show how it works, rather than relying only on a polished narrative. The Inter-American Development Bank’s Venture Capital Fund Toolkit recommends examining whether the proposed assets, philosophy and strategy match the stated investment thesis.
2. Can this team execute, and what does its track record actually show?
A fund’s historical results are useful only when you understand how they were produced and whether the people and process responsible will carry over. Request an investment-by-investment record and reconstruct the results rather than accepting a single headline return figure.
- For each material prior investment, who sourced it, approved it and worked with the company?
- Which outcomes are realized and which remain unrealized? What valuation evidence supports unrealized marks, and how often are they reviewed?
- What drove the strongest and weakest results? What did the team learn, and what changed in its process afterward?
- Who will devote time to this fund, what are their responsibilities, and how are team economics and succession handled?
- What happens if a key person leaves or is unable to continue? Which protections and procedures apply?
Seek attribution and supporting material, such as investment records, valuation documentation and examples of the team’s involvement. The IDB toolkit addresses prior performance and value drivers; the published extract from Private Equity Fund Investment Due Diligence discusses quantitative track-record analysis in relation to risk management and performance over long horizons. Past outcomes do not guarantee future performance.
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3. Are alignment, conflicts and governance protections clear?
Ask how the GP’s interests align with LPs in practice, and identify situations where the manager or its affiliates may face competing incentives. Test the answers against the fund’s governance provisions, not just a general statement that conflicts are managed fairly.
- How much are the GP and principals committing? How is the commitment funded, and how is it allocated among them?
- What conflicts may arise between this fund, predecessor funds, affiliates, co-investments and portfolio companies?
- How are investment opportunities allocated across vehicles, and how are related-party transactions reviewed and disclosed?
- What rights do LPs have through an advisory committee, and what consent rights or key-person protections are in the LPA?
- How and when will the GP disclose regulatory inquiries, litigation or other material incidents?
Use ILPA’s Principles and its questionnaire as prompts, then confirm the fund-specific answer in the LPA and related disclosures. The Principles’ third edition was published in June 2019.
4. What will the fund cost, and which terms govern?
Have counsel compare the LPA, offering materials and any side letter for consistency. The SEC’s Investor.gov says fund documents and agreements govern fees and expenses over the fund’s life, so evaluate the full set of terms rather than relying on a summary of headline economics.
- Management fees and offsets: How are fees calculated over time, and which other income or charges offset them?
- Fund and portfolio expenses: Who pays organizational costs, broken-deal costs, transaction expenses and portfolio-company expenses? Are there caps, allocation rules or cost-sharing procedures?
- Carried interest and distributions: How is carried interest calculated? What distribution waterfall applies, and how does the clawback work?
- Fund duration and capital use: What is the fund term, how may it be extended, and under what conditions may capital be recycled?
- LP rights and remedies: What reporting and audit rights apply? What transfer restrictions, default remedies and side-letter provisions could affect an LP?
Ask for examples of how expense allocation works in practice and what disclosures LPs receive. ILPA’s Principles & Best Practices resources address expense caps, fair cost sharing and fee transparency.
5. Can you manage capital calls and the fund’s liquidity profile?
Plan for the possibility that capital will be committed for years without a predictable exit or a convenient way to withdraw. Review the LPA’s call schedule and remedies, and assess whether your organization could fund calls on time under adverse conditions.
- What is the expected fund life, what extensions are possible, and who approves them?
- What does the GP expect about the timing of distributions, and what assumptions support that expectation?
- What happens if an LP misses or cannot fund a capital call? What remedies and penalties are specified in the LPA?
- Does the fund use subscription lines? For what purposes, at what cost, and how will their effect on reported performance be shown?
For any subscription facility, ask for its terms, costs, exposure and impact on performance reporting—not only whether one exists. ILPA’s Principles & Best Practices guidance addresses subscription-line transparency. Investor.gov’s warning about long holding periods and withdrawal limits applies as a general private-fund caution; the specific venture fund’s LPA determines the LP’s rights and obligations.
6. Are valuation, operations and compliance controls credible?
Early-stage holdings can be difficult to value, and a GP’s reported marks are not the same as realized proceeds. Ask who performs key operational functions, how valuations are governed and what independent checks support the GP’s claims.
- Who administers the fund, audits it, maintains records and values investments?
- What valuation policies apply to hard-to-price holdings? Who reviews and approves changes?
- What controls cover cybersecurity, business continuity, compliance and personal trading?
- What litigation, regulatory matters, alleged misconduct or conflicts should LPs know about, and how are material developments disclosed?
Request relevant policies, audit information, valuation procedures and explanations of material exceptions. The IDB toolkit identifies conflicts, misconduct, litigation, risk and the legal framework as diligence topics. Distinguish the GP’s own statements from independent evidence and document review.
7. What reporting and responsible-investment information will LPs receive?
Agree on the information you will need to monitor the fund and whether it will arrive on a useful schedule. Ask how the manager handles responsible-investment matters that are material to the strategy and to your own mandate.
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- What portfolio data, valuation explanations, capital-call notices and annual audited reports will LPs receive, and when?
- Are reporting definitions consistent across the manager’s funds and vintages?
- Which environmental, social or governance risks are material to this strategy, and how are they assessed before and after investment?
- How are incidents, follow-up actions and progress communicated to LPs?
PRI’s venture-capital DDQ covers policy and governance, fundraising, pre-investment and post-investment practices, reporting and disclosure. Use it to develop mandate-relevant follow-ups rather than treating a completed questionnaire as proof that a practice is effective.
How to compare funds without relying on a universal score
Evaluate each candidate on the same dimensions, then set the importance of each one according to your mandate and risk capacity. No universal score or weighting is established for choosing among venture funds.
- Fit with your portfolio and investment mandate
- Clarity of strategy and portfolio construction
- Team continuity and relevant, attributable track record
- Fee and expense burden, GP alignment and conflict protections
- LPA rights, reporting quality and liquidity practices
- Operational controls and responsible-investment fit
Keep a record of the GP’s answer, the evidence supplied, the document that governs the point and any unresolved follow-up. This makes differences between managers easier to see and helps prevent a strong presentation from substituting for a verifiable answer.
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