📚 Chapter 13Part III: The Capital Stack

LP Due Diligence: What Allocators Actually Evaluate

Six dimensions. Most managers prepare for one or two. The ones who prepare for all six raise faster.

TC
Trace Cohen
3x founder · 65+ investments · Author, The Value Add VC

Key Insight

Sophisticated institutional LPs run a systematic six-dimensional evaluation: track record and attribution, portfolio construction, fund size discipline, team and succession, LP relations and reporting, and exit realism. Most first-time managers polish their investment thesis and team story — and miss four of the six. The managers who prepare for all six, especially exit realism, raise fastest.

6
Dimensions of LP due diligence
4%
Seed-stage healthcare companies exiting >$500M (per decade)
1–2
Dimensions most managers prepare for
6 wks
Time to commitment after credible exit realism

The Preparation Mistake

Most first-time fund managers prepare for LP meetings by polishing the investment thesis, rehearsing the team story, and updating portfolio slides. Those things matter. But sophisticated institutional LPs run a more systematic evaluation than most managers anticipate — and knowing the framework changes how you prepare.

The Six Dimensions

01
Track Record and Attribution
LPs want to understand specific sourcing. Did you find this deal yourself, or did it come through your prior firm's platform? Is the edge portable to a new vehicle? Attribution matters as much as the return multiple. A 5x return on a deal that fell into your lap proves you can underwrite — not that you can source.
02
Portfolio Construction
Can you describe, in precise numbers, how your construction generates the return profile you're targeting? Initial check size, target ownership, reserve ratio, exit ownership assumption. Ranges signal that the plan isn't concrete. 'We target 8-15% ownership' means you haven't decided. '10% is our floor for initial checks above $1M' means you have.
03
Fund Size Discipline
Correctly sizing the fund to your deal access and exit distribution signals that you understand the math, not just the marketing. Overcapitalized relative to your strategy is a red flag. A $200M emerging manager fund that needs the same exit outcomes as a $50M fund twice over is not a bigger opportunity — it's a broken model.
04
Team and Succession
For solo GPs: proactively address key-person risk. How does the portfolio get managed if something happens to you? Do you have named advisors with capacity? Are portfolio company relationships documented well enough for continuity? Have an answer before they ask.
05
LP Relations and Reporting
References matter enormously — more than most managers expect. LPs call your references before making commitments. Managers who stayed transparent during difficult portfolio situations get materially better references than those who went dark when the news was bad. Proactively share your reporting templates in diligence.
06
Exit Realism
Show that you've modeled the empirical exit distribution, not the aspirational one. Know the historical exit frequency in your specific stage and sector. Build your fund model around the median, not the tail. If your model requires outcomes that are statistically rare, be ready to explain why your portfolio is positioned to capture those rare events consistently.

The Story from the Book

A manager raising her first institutional fund was stopped mid-presentation by an endowment CIO: “What percentage of seed-stage healthcare software companies in the last decade achieved exits above $500M?” She didn't know. She went home, did the research (roughly 4%, about 1 in 25), rebuilt her model around that number. The same endowment committed six weeks later. LPs don't fund optimism. They fund clarity.

The Preparation Advantage

Emerging managers have genuine advantages on several of these six dimensions. Fund size discipline is easier when you're raising your first fund and haven't yet succumbed to the pressure to drift. Exit realism is easier when you haven't spent years presenting optimistic projections to existing LPs. Track record attribution is cleanest when you've actually sourced your deals independently.

Use those advantages. The managers who prepare honestly for all six dimensions, especially the uncomfortable ones like exit realism and key-person risk, raise faster and with better LP relationships than those who try to present a polished narrative that falls apart under serious diligence.

Frequently Asked Questions

What are the six dimensions of LP due diligence for emerging managers?+
1. Track record and attribution — not just returns, but which deals you found yourself vs. received through a platform. 2. Portfolio construction — precise numbers on check size, ownership targets, reserve ratio. 3. Fund size discipline — is the fund sized to your actual deal access and exit distribution? 4. Team and succession — for solo GPs, how does the portfolio get managed if something happens to you? 5. LP relations and reporting — transparency during difficult situations matters more than during good times. 6. Exit realism — have you modeled the empirical exit distribution, not the aspirational one?
What is track record attribution and why do LPs care so much about it?+
Attribution answers the question: could you generate these returns in your own fund? An LP at your prior firm who surfaced the deal, introduced you to the founder, and did the primary diligence — that's their return, not yours, even if you're listed as co-investor. LPs evaluate attribution rigorously because sourcing edge must be portable to your new vehicle. A strong track record built on platform-sourced deals doesn't prove you can source independently.
What does 'exit realism' look like in an LP pitch?+
Exit realism means showing that you've modeled the empirical exit distribution, not the aspirational one. Know the historical exit frequency in your specific stage and sector. Build your fund model around the median outcome, not the tail. If your model requires three $1B+ exits from a 20-company portfolio but the historical rate for your sector is 4% of seed-stage companies reaching $500M+, be ready to defend the math. LPs don't fund optimism. They fund clarity.
How should solo GPs address key-person risk in LP diligence?+
Proactively address it before they ask. Have a concrete answer: which advisors would step in during an emergency, how portfolio company relationships are documented, whether any co-investors have capacity to provide additional support. Better: have a named 'investment advisor' or 'venture partner' arrangement with someone credible who can serve as continuity. LP concerns about key-person risk are real — a solo GP who is incapacitated means the portfolio may not get the active management it needs.
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