How Venture Funds Can Win LP Trust in Challenging Markets

There’s an old saying: “When the tide goes out, you find out who’s been swimming naked.” In today’s venture capital (VC) market, where funding cycles are slowing and liquidity is tight, this adage is a stark reminder for General Partners (GPs). The current market challenges are pushing Limited Partners (LPs) to reassess their commitments, and GPs need to adapt to meet shifting expectations. Here’s how to navigate this new environment—and thrive.

The New Reality: Slower Fundraising Cycles and Strained Liquidity

In a frothy market, raising a fund often feels like a sprint. But as the market slows, it’s more like a marathon—and only the most prepared will endure. LPs, faced with reduced distributions and tightened budgets, are scrutinizing every dollar they commit. Funds raised in record time during the bull market are now deploying capital slower, while LPs look for ways to balance liquidity constraints with long-term goals.

The first lesson for GPs: Understand your LPs’ constraints. Liquidity pressures don’t just mean smaller checks; they mean harder conversations. Acknowledge their challenges, and be ready to discuss how your fund fits into their evolving strategy.

Strategy Over Sentiment: Why Fund Size Matters

The market’s slowdown has highlighted a growing preference among LPs for mid-sized funds. Why? These funds—typically in the $300 million to $700 million range—offer a Goldilocks zone: small enough to stay agile, but large enough to deliver meaningful returns.

Contrast this with billion-dollar funds, which struggle to produce outsized returns, and microfunds, which are often too risky or under-resourced. For GPs, the takeaway is clear: Align your fund size with the scale of opportunities you can realistically deliver on. Overreach and you risk becoming irrelevant; underplay and you’ll struggle to scale.

The Alignment Dilemma: How to Bridge GP-LP Incentive Gaps

The biggest tension in the GP-LP relationship stems from incentives. GPs often aim to sell stakes in successful companies early to demonstrate DPI (Distributions to Paid-In Capital), raising their next fund faster. Meanwhile, LPs—especially institutional ones—prefer long-term gains, maximizing value rather than locking in short-term wins.

How do you bridge this gap? Communication. Transparency about your fund’s strategy and rationale for key decisions, like secondary sales or distribution timing, can build trust. More importantly, consult your LPs before major moves. Understanding their preferences—and demonstrating your willingness to act as a fiduciary—can turn misalignments into partnerships.

Playing the Long Game: Embracing Power Law Thinking

VC is a power law business. The outliers—the Coinbases and Ubers of the world—drive the vast majority of returns. LPs know this, and they expect GPs to think accordingly. Funds that play it safe, focusing on consistent singles and doubles, will struggle to meet LPs’ long-term expectations for outperformance.

The practical takeaway? Aim for fund returners. Focus your resources on cultivating companies with the potential to return 5x or 10x the fund, and don’t be afraid to double down on winners.

Differentiation in an Overcrowded Market

When everyone’s pitching the same strategy, the differentiators stand out. For emerging managers, that means defining a clear niche or thesis. Are you the go-to fund for climate tech? Deep tech? Pre-seed consumer startups? A strong, specific thesis can be the difference between catching an LP’s attention and being another name on a spreadsheet.

For established managers, it’s about showing evolution. LPs want to know that you’re not just repeating the past, but also adapting to new market realities. Publish your findings, share your research, and stay ahead of trends—it’s the fastest way to prove you’re still a leader in your space.

Hard Conversations: Managing Downturn Realities

The hardest part of being a GP today might be saying “no”—to LPs, to portfolio companies, and even to your own instincts. As funding slows, tough decisions will become inevitable. You may need to:

• Reduce fund size to align with LP appetite.
• Walk away from underperforming investments to protect the portfolio.
• Accept smaller commitments from LPs, knowing that they might reallocate in better times.

These are difficult but necessary choices. And they’re made easier with data. Show your LPs why you’re making these decisions, backed by evidence and logic. When the dust settles, they’ll remember your discipline.

The Endgame: Staying Relevant in a Changed Market

Success in this market is less about sprinting to the next fundraiser and more about staying in the game. That means aligning incentives, focusing on power law outcomes, and adapting to what LPs need now, not what worked two years ago. The GPs who master this balance will not only weather the storm but emerge stronger, with LPs who trust them more than ever. 

About Taghash

Taghash provides an end-to-end platform for venture funds, private equity, fund of funds, and other alternative investment funds. Over the last seven years, we have served as the tech arm for top VCs, helping them manage operations across deal flow, portfolio, fund, and LP management. Trusted by leading fund managers like Blume Ventures, Kalaari Capital, and A91 Partners, we enable our clients to achieve greater success. Click here to book a demo.