LP Investing 101

Being based in Silicon Valley, we have a number of investors who invest in early stage tech companies. I’m often asked to compare real estate and venture capital investment philosophies. The primary difference is we expect all of our investments to be successful (1.7x+ equity multiple), we don’t bank on one home run to carry nine investments that go to zero.

Our imbedded family office invests in early stage tech companies and I find the philosophies to be more similar than different. Below are some of the key similarities:

1. Execution: We ask ourselves, “do we like the team and do we believe they can execute?” To answer this, we look at a historical track record of execution. We also want a level of confidence the sponsor has identified the key risks associated with their business plan.

2. Alignment of interest – we always look for deals where the sponsor has skin in the game. For example, at Westlake we invest 10-30% of the equity for all of our self-storage deals and raise the rest from family and friends. We see deals where the co-invest is 2% and the fees are 2% so basically the sponsor doesn’t have any skin in the game. For us, this would be a major red flag. We also look to make sure the carry structure and fees align the sponsor and investor incentives.

3. Business Plan – as an investor, do I like what the company does and how the management team plans to grow it. In the case of real estate, it would the property and the investment thesis.

Certainly there are nuances but the basic fundamentals of investing are the same when picking good real estate investments and early stage tech companies. As always, feel free to reach out with any follow up questions.