The Rise of the Solo General Partner Investor

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While modern day venture capital originated in the 1940s, the very first iteration of venture capital (VC) investments--where a general partner (GP) investments capital on behalf of a limited partner (LP)--dates all the way back to the early 1600s with the founding of East India Company (EIC) under Queen Elizabeth I.

To give a sense of its magnitude, EIC was the equivalent of today's Apple (NASDAQ: AAPL) or Google (NASDAQ: GOOGL). It was the antecedent to modern day corporations.

Now, granted today's investment model is arguably a more ethical and sustainable evolution of that model. However, this goes to show that while modern-day venture capital really exploded over the last decade or so given some of the lowest interest rates in recent history, the high-risk high-reward model isn't as new as some might have anticipated.

And now, the industry is once again ripe for disruption.

Enter the solo GP. Coined by Nikhil Trivedi, and often referred to as "solo capitalist". In his view, one must meet the following criteria for a solo GP:

  1. The sole general partner who manages a fund's operations and admin needs
  2. The sole decision market on capital allocations (i.e., is the investment team and committee)
  3. conducts all due diligence on potential investment opportunities,
  4. Builds industry relationships and personal branding to source investments (not all dollars are valued the same in the private markets)
  5. Raises larger funds compared to angel investors / super angels ($50M+ funds, investing $5M+ in rounds)
Most importantly, a solo GP competes against traditional VC firms in investment rounds. In short, it's a constant uphill battle and often not pursued by first-time investors. Former founders, entrepreneurs, or seasoned investors who have an edge or niche in a particular industry, geography, or area of expertise are often the ones who pursue role as a solo. This allows a solo GP to not only stand out amongst the numerous other VC firms but gives them greater conviction and ability to quickly come to a "yes" or "no" decision.

The upside to being a solo GP is that he / she is able to move quickly, not bogged down by processes or investment committee approvals. This speed and certainty are sometimes key for a cash-strapped startup that needs an influx of cash fast. Because solo GP's are often founders and entrepreneurs in their own right, they are more likely to offer founder-friendly terms, having been in the same shoes themselves.

So how is a solo GP different from an angel investor?

An angel investor is a single individual that backs a startup in pre / seed round investment (also known as the "friends and family" rounds, in reference to who typically invests during the earliest innings). Solo GP's, on the other hand, invest not only in the early stages but also beyond Series A & B. A solo GP is also not investing their own capital - they invest money on behalf of limited partners (LPs) through what is called a special purpose vehicle (SVP).

As Nikhil Trivedi describes it, "I (and others, privately) call these individuals solo capitalists because I view them as a distinct group, separate from angel investors and from venture capital firms, in today's financing ecosystem". He includes examples of a few solo GP's who in his view meet the definition including "Elad Gil, Josh Buckley, Lachy Groom, Oren Zeev (Zeev Ventures), Ray Tonsing (Caffeinated Capital), and Shana Fisher (Third Kind Venture Capital)".

While the solo GP model presumes a single individual, as per the name, a GP often recruits one or two associates to help with the workload around diligence, portfolio management, and LP requests.

In an interview with AngelList, solo GP Banana Capital's Turner Novak said: "hired someone because I simply didn't have time to do everything anymore. Running a fund is a lot more work than angel investing. Having an associate helps me be more efficient." The solo GP model is expanding to a "solo + analyst / associate" GP model.

According to AngelList, "As solo GPs raise increasingly larger funds, they're hiring staff to help evaluate companies, support founders and limited partners (LPs), and manage the back office. While these jobs go by a variety of names-"chief of staff," "analyst," "associate," etc.-they all share one goal: provide solo GPs more leverage." Although solo GP is now becoming a misnomer in some cases, the team is still 10x leaner than a traditional VC firm.

Now the ultimate question: how do solo GP returns compare to those of a typical VC? According to a Q3'21 ranking by AngelList of the top investors by markup rate, 7 out of 20 co-investors were solo GPs, not venture firms. Simply put, a markup is when VC B invests in a portfolio company of VC A at a higher valuation compared to the previous round, VC A is able to show that its investment appreciated in value. This intermediary metric is used as a proxy for fund returns, which not only makes current LP's happy but also attracts new ones.

Because solo investors can be more flexible on ownership, deal terms, and board structure, they have a strong competitive advantage compared to VC's which sometimes have extremely large funds on which it becomes difficult to generate high returns - solo GPs don't make large risky bets with the hope that returns on one portfolio company cover the losses of the rest and generate net return. They have less room for error which means they need to be much more disciplined and pragmatic with their time, capital, and resources.