Why founders should care about where VCs get their money

by Hadley Harris and Anthony Ha

Image: Unsplash/Jinyun

Should founders try to find out who’s investing in their investors? Here at Eniac, we believe they should — in fact, Hadley recently tweeted that he’s been “very surprised” that founders don’t bring this up more often. And all the responses made us realize it’s worth discussing the topic in more depth.

One thing that became clear is that there’s still a lot of confusion about how the VC model actually works. Contrary to what many people seem to believe, VCs aren’t just wealthy individuals who invest their own money. They do generally put money into their funds, but the vast, vast majority comes from outside investors called limited partners (LPs) — in other words, VCs have to go through the pain of fundraising themselves.

Here at Eniac, we’ve raised funding from all the major types of LPs, including pension funds, university endowments, foundations, funds of funds, family offices, and wealthy individuals. Over time, we’ve been able to be more picky about which LPs we work with, and that means we’ve increasingly focused on working with organizations that align with our values. The only new LPs allowed into our most recent fund, Eniac Select, were charitable foundations and nonprofits.

Of course, many founders struggle to raise any funding at all. So if someone’s offering to write you that first check, it can seem ridiculous to cross-examine them about where that money is coming from. Whether you’re a founder or a VC, being picky about your funding sources is absolutely a luxury.

But then, it’s also a luxury to care about whether your food is organic or ethically sourced. Just because something is a luxury doesn’t mean people can’t or shouldn’t care about it.

Certainly, if your fundraising efforts are going well — if multiple VCs are competing to back your company — then it’s worth asking where the money is coming from. They may not be able to give you a comprehensive, detailed list of all their LPs, but they should be able to tell you about the general makeup of the fund. You can also ask whether specific political organizations or individuals have invested. (Recall, for example, the debate around Silicon Valley’s connections to Saudi royalty after the murder of journalist Jamal Khashoggi in 2018.)

To be clear, as a founder, you probably won’t ever have to deal with those LPs directly. But if your startup ends up making billions of dollars for your investors, it might leave a bad taste in your mouth to discover that you’re enriching people or organizations whose values are diametrically opposed to your own.

Conversely, we’re grateful to know that when Eniac makes money, we’re helping organizations we actually believe in — that we’re funding cancer research, generating more scholarship money, or securing a comfortable retirement for public servants.

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Eniac Ventures

We lead seed rounds in bold founders who use code to create transformational companies.