By Dmitry Smirnov

In the third quarter of this year, venture capital fundraising tightened significantly, with only $66.5 billion raised — down 16% quarter over quarter and 15% year over year. Amid this challenging environment, institutional investors are being more cautious and reassessing their investment strategies. For some VCs, this has highlighted an often-overlooked fundraising approach: courting entrepreneurs, including ex-portfolio founders, as limited partners.

Here’s why it worked for us.

Why choose founders as LPs?

Dmitry Smirnov, founder and partner at Flint Capital

Institutional investors can be a reliable source of capital, but they come with lengthy onboarding cycles and high reporting demands. Conversely, tech-driven entrepreneurial LPs move faster on investment decisions and offer flexibility with check sizes. Many of our LPs start small — $1 million to $2 million — and expand their commitments as they see results, allowing us to make strategic adjustments throughout the fund’s lifecycle.

Some of the entrepreneurs we have as LPs are, in fact, founders of our ex-portfolio companies, including CyberX (acquired by Microsoft in 2020). By inviting them to become LPs, you build a naturally trusted partnership — one rooted in shared experience and mission. This loyalty and commitment are unique to founder-LP dynamics.

How to build and sustain these partnerships

At Flint Capital, we have always positioned ourselves as a “founders’ friendly fund,” and we’ve been very intentional about that. When we see something unfair happening, we step in as an arbitrator to sort it out.

Here’s an example: A significant strategic investor was about to enter one of our portfolio companies, and we agreed on the valuation. But later, they came to us and offered us a premium above the set valuation, meaning we’d get more for our shares, while they wanted to significantly push down the founder’s valuation compared to what we’d discussed.

They asked us to stay out of the way, and we took a hard stance, saying, “No, this won’t happen.” We’d established a consolidated position for the sale, agreed upon a valuation, and the deal would either be at this valuation, or there’d be no deal. The investor went ahead and completed the deal on the initially agreed on terms.

We also spend time together besides business discussions. We play paddle tennis, have drinks, attend Vipassana meditation retreats, and attend races. Sometimes, we go on hikes or party at Burning Man.

I have countless stories, but they all communicate the same message — when our founders realize that we have their back, they feel the power of an authentic partnership.

Creating a collaborative culture

Entrepreneurial LPs bring more than capital, they also bring networks, insights and credibility.

To fully leverage these benefits, it is very important to maintain open communication channels and regularly update them on developments. Not only do they value this, but they can add more help by contributing to your pipeline and referring leads for whatever your needs are. These direct, results-oriented conversations resonate better than extensive reports and formalities.

This creates a virtual advisory board, critical to spot trends and adapt strategies. Entrepreneurs-turned-LPs bring in-depth industry expertise and readily connect with current founders, helping them through scaling challenges. This rapport is something difficult to replicate solely with institutional investors.

A model that’s not for everyone

Raising funds from entrepreneurs might not be the right choice for every fund. Institutional LPs remain a cornerstone for many VCs, bringing the stability and substantial funding that many firms rely on. However, if you’re looking for a more agile, relationship-driven approach, building an LP base with founders can be a practical and strategic alternative.

Dmitry Smirnov, with 15-plus years of experience in venture capital investments, is the founder and partner of Flint Capital, a Boston-based VC fund that invests in early-stage tech companies across the U.S., Europe and Israel. The firm has had 22 successful exits, two IPOs and three unicorns.

Illustration: Dom Guzman