Navigating the Use of Placement Agents in Venture Capital Fundraising: Tips, Tricks, and What to Look Out For

The most recent Global Fundraising Report by Venture Capital Journal shows that capital raised in Q3 2024 surpassed previous quarters, but optimism remains limited due to increased market consolidation. While the average fund size has hit an all-time high, many fund managers are grappling with challenges in the market and are turning to placement agents (PAs) for the first time to secure commitments.

This article offers practical advice on what to consider when selecting a PA, including tips and potential pitfalls to avoid.

Key Considerations When Seeking a Placement Agent

• Professionalism and Reputation: Assess the agent’s track record and industry reputation by conducting thorough diligence. It’s essential that their approach aligns with your fund's goals and image. Look for agents with a solid history of successful placements, not just impressive resumes.

• Fund Size and PA Effectiveness: Effectiveness often correlates with fund size. Placement agents generally prioritize larger funds because their commission-based payment model incentivizes them to pursue big checks. If you manage a smaller fund, you may find that a PA's efforts are less effective or focused, as smaller commitments reduce their overall payout. Consider if your fund’s size warrants working with a PA at all.

Matching with the Right Placement Agent

• Interview Extensively: Don't let the PA just interview you—flip the script. Ask why they believe they can be successful with your particular fund. How many clients do they work with at the same time? How much focus will they dedicate to your fund? Crucially, how much of your target raise do they realistically believe they can help you secure? Interview multiple agents and compare their answers.

• Assess Their Network: A PA's value is rooted in their connections. Make sure their network aligns with the type of LPs you’re targeting. For example, if you're raising a $25M fund, a PA whose main connections are sovereign wealth funds or large endowments may not be the best fit based on the check size those institutions typically write. Ensure the PA’s relationships are suited to the size and focus of your fund.

• Ask for References: Request references from funds that share similar characteristics to yours—same fund size, stage, industry, and target LPs. Speak to GPs who’ve worked with the PA to understand how the agent performed in comparable situations.

Key Contract Considerations

• Retainers: While retainers might feel like a risk, data shows that PAs often perform better with one in place. Consider whether paying a small monthly retainer could ultimately help secure the capital you need faster.

• Commission Rates: As a general rule, PAs charge 2%-3% for funds under $500M and 1%-2% for larger funds. Some contracts may have sliding scales that lower the commission rate after the PA hits certain thresholds. Be cautious of clauses that obligate you to pay a commission on future LP commitments for subsequent funds—they’re negotiable and should be pushed back on if possible.

• Exclusivity Clauses: Many PAs prefer exclusivity, but if you plan to work with multiple agents, ensure you define clear lanes to avoid duplicate outreach to the same LPs, which could appear disorganized. You can segment responsibilities by:

• Time: Work with one PA for a set period (e.g., 6 months) and another afterward.

• Region: Allocate LP contacts by geography based on the PA’s strengths.

• Type of LP: Assign different LP types to different PAs, such as family offices for one and institutional investors for another.

Milestones: Incorporate performance-based milestones into the contract. For instance, you could tie retainer payments to specific achievements, such as raising the first $10M, to incentivize progress.

How to Work Effectively with Your Placement Agent

• Regular Meetings: Set up weekly or bi-weekly check-ins to help maintain transparency, align strategies, and provide the opportunity to adjust tactics if needed. Use these meetings to ensure everyone has the necessary materials (e.g., one-pagers, ODD documents) and to evaluate which approaches are yielding results.

• Clear Processes: Clarify roles and responsibilities from the start. Who is taking the first call with an interested LP? Who sends the deck and follows up with access to the data room? A well-defined process can eliminate confusion and keep the fundraising effort on track.

• Avoid Audience Overlap: If you’re doing LP outreach concurrently with the PA, ensure the audience is clearly segmented (same as if you’re working with multiple PAs). Crossing wires risks looking disorganized and could diminish the professionalism of your outreach.

Placement agents can play a critical role in your fundraising success, but choosing and working with the right one requires careful consideration. From aligning their network with your target LPs to negotiating key contract terms like retainers and exclusivity, navigating this relationship thoughtfully can make all the difference. By following these tips, you can increase the odds of a smooth and successful capital raise while avoiding common pitfalls that may arise when partnering with a placement agent.

In a challenging fundraising environment, having the right PA on your side can unlock doors. But as always, it’s about finding the right fit for your fund’s unique goals and needs.

At Strut Consulting, our white glove Investor Relations service focuses on assisting VCs in refining their pitch, targeting LPs, creating data room materials, setting up LP onboarding processes, and ensuring our clients have the right tech stack for a successful raise. Ready to get started? Reach out to us here.

Navigating Unusual LP Requests: What’s Normal in Due Diligence and What’s Not

GPs are experiencing more than ever, a new wave of sensitive, and at times, intrusive requests from LPs during due diligence. While it’s standard to provide background information, track records, and compliance documents during the due diligence process, some recent asks are raising eyebrows and making GPs uncomfortable. These requests are not just intrusive—they could be a sign of deeper, strategic motives that GPs need to be aware of.

What’s Normal to Provide During Due Diligence?

In any fundraising process, there are certain pieces of information that GPs can expect to share with potential LPs:

• Background Information: This includes the history of the firm, its investment strategy, and bios of key team members. LPs need this to understand who they’re investing in and the firm’s approach to managing investments.

• Track Record: Performance metrics such as gross and net internal rates of return (IRRs), multiple on invested capital (MOIC), and distributions to paid-in capital (DPI) are standard fare. These metrics provide LPs with a clear view of the firm’s past success and future potential.

• Portfolio Overview: High-level data on portfolio companies, including sector allocation and a breakdown of unrealized versus realized investments, helps LPs assess diversification and risk.

• Compliance Documents: Providing documents like the private placement memorandum (PPM), limited partnership agreement (LPA), due diligence questionnaire (DDQ), and annual reports are a necessary part of the legal and regulatory process.

When Requests Cross the Line

However, in recent months, my clients (GPs of a diverse array of VC funds) have reported a surge in requests that push the boundaries of what’s typical—and acceptable:

• LP Contact Information: Some GPs have been asked to provide the contact details of all existing LPs in the firm. Sharing a full list of LPs, especially with their contact information, not only breaches privacy but also raises concerns about the LP’s intentions. Many have been wondering whether these requests are linked to an effort to raise their own outside capital or to bolster their ability to spin out placement agent services. Although providing contact information for one to three LPs to serve as references is normal and acceptable, asking for the entire list is simply not.  

• Portfolio Company CEO Information: Another troubling request I have been seeing is asking for highly specific and all-encompassing valuation data alongside contact information of portfolio company CEOs. This kind of ask can be an attempt to gather data to fuel an LP’s own deal flow or investment strategy. Providing such detailed and direct contact information can expose portfolio companies to unsolicited communication and even competitive risks.

Why These Requests Are Problematic

These requests are more than just intrusive—they signal potential conflicts of interest and a breach of trust:

• Competitive Concerns: LPs might have their own investment arms, or they could be connected to competitors. Sharing sensitive information could inadvertently benefit a competitor or undermine the GP’s position in the market.

• Data Strategy: some LPs may use the data they collect to build their own investment strategies, leveraging the information GPs provide to their advantage.

• Privacy and Trust: GPs have a duty to protect the privacy of their LPs and the executives within their portfolio companies. Sharing overly sensitive information can damage relationships and breach the trust that underpins successful partnerships.

Setting Boundaries: What GPs Should Never Provide

While GPs should be transparent and cooperative during due diligence, it’s crucial to set boundaries on what information is shared:

• LP Contact Information: This should be kept confidential. Instead of providing a full list, GPs can offer references from a few LPs who are willing to speak with potential investors.

• Portfolio Company CEO Details: Similarly, find a few founders who are willing to be your advocate and add their contact information to a list of references. Think strategically about who to include in order to create a holistic view of your ability to source, diligence, negotiate, and provide value.

• Granular Valuation Data: While sharing valuation methodologies may be necessary, GPs should resist providing highly detailed or company-specific valuation information (e.g., cap tables) that could be misused.

In this difficult fundraising climate, it’s understandable that LPs are seeking more information to mitigate their risks. However, GPs must remain vigilant about the boundaries of what’s appropriate to share. By setting clear limits and understanding the motives behind unusual requests, GPs can protect their firms, their LPs, and their portfolio companies from potential risks. Transparency is key, but so is safeguarding sensitive information in an environment where trust is increasingly valuable.

At Strut Consulting, our white glove Investor Relations service focuses on assisting VCs in refining their pitch, targeting LPs, creating data room materials, setting up LP onboarding processes, and ensuring our clients have the right tech stack for a successful raise. Ready to get started? Reach out to us here.