How VCs can co-invest with LPs to get the best out of their investmentsPeople looking to invest have never had it so easy. Investors who are not traditional VC firms, but invest in venture capital deals, have been increasing their presence in the investing community.McKinsey discovered that co-investment deals have more than doubled in value to $104 billion between 2012 and 2018. According to some estimates, as many as 1,600 investors are helping fund venture capital deals by 2021.Nontraditional investors are motivated by higher returns and co-investing with VC funds is a great way of achieving that. Recent Preqin research shows that co-investing funds outperform traditional funds.Research has shown that 82% of investors believe their co-investments outperform private equity fund investments. 46% of them outperform by more than 5%. The fees charged to investors are generally lower than traditional private equity and VC funds.Be realistic when evaluating deals. Most companies will not be the next tech unicorn.Shared investment risk can be a benefit to all investors, as well as building loyalty and trust. This type of investing is hands-on and requires that investors work closely with general partners (GPs). Investors have the opportunity to build deeper relationships with GPs and gain a better understanding about their investment strategies and deal review process. These relationships are essential for new investors to improve their investment skills over the long-term.Alternative investors are why VCs love themCo-investing is not just beneficial for alternative investors, but also for GPs. Partnering with alternative investors gives them a wider range of funding options and allows them to leverage their capital with potential investments.Other benefits for VCs include: While the LPs who co-invest in the business remain passive, the VC can use their voting power to protect investor rights and consolidate decision making. They can also put more money into any company, while still maintaining diversification limits.
