It’s the kind of thing most founders never think about… until it’s too late.
When you’re out raising money, you focus on the VC in front of you. You work on your pitch, polish your deck, rehearse your numbers. You assume the decision lives and dies with the fund’s partners.
But there’s another layer, one that’s now deciding your fate more than you realize.
The LPs Have Left the Building
LPs (Limited Partners) are the people and institutions that supply venture capital firms with the actual money they invest. Pension funds, family offices, endowments… these are the deep pockets behind the VCs.
In 2021 and 2022, LPs were throwing money at new funds. If you were a VC, raising capital was almost frictionless. First-time funds closed fast, and there was plenty left over for fund number two.
Now it’s a completely different ball game. The same LPs are slower, pickier, and in many cases, not interested in second funds from managers who haven’t yet proven themselves. And perhaps most importantly, they won’t commit to follow-on rounds.
According to S&P Global Market Intelligence, global VC-backed funding rounds fell 26% year-over-year in February 2025, one of the sharpest declines since the boom years of ’21 and ’22.
Why This Matters to Founders
If the VC you’re pitching is raising their second fund in this climate, you need to know this:
1. Their Capital Base May Be Smaller – If they’re not locking in enough LP commitments, their ability to lead rounds shrinks. They might offer you less money or ask for more aggressive terms.
2. They Could Be Playing Defense – If they’re under pressure to show quick wins to attract LPs, they may push you for unrealistic growth or “signal” rounds that aren’t in your best interest.
3. They Might Ghost You, Too – If their fundraise stalls, deals already in the pipeline can get quietly dropped. Founders are left hanging.
The “Tweener” VC Problem
Here’s the dynamic at play:
• First-time managers can sell the dream: small fund, high potential, fresh energy.
• Established managers can sell the track record: years of returns, proven exits.
• Second-time managers without big wins yet? They’re in “tweener” territory. LPs hesitate, capital commitments lag, and that tension trickles down to you and your startup.
If you’re raising now, you need to know if your VC prospect is stuck in that middle zone. You can do that by quickly looking at projects funded YTD.
What Founders Should Do About It
1. Ask Direct Questions
After generating early interest, and ideally already having a lead order, you have every right to ask: “Is this fund fully closed?” or “How much dry powder do you have right now?”
This isn’t rude. It’s smart. And you can do so by prefacing it with the fact that your round is only so big, you would like to fill it with X amount of investors (not too many, not too little), and therefore have to be careful with allocations.
Strong Answer from the VC: “Yes, we closed $250M last quarter. We’ve reserved 50% for follow-ons.”
Red Flag Answer: “We’re still in the process of final closes, but don’t worry, we’ll have plenty of capital.”
→ Translation: they may be writing checks off soft commitments, which means if an LP backs out, your follow-on could vanish.
2. Vet Their LP Base
If their LP roster is concentrated in a few relationships, one pullback could freeze your funding. A more diversified LP base usually means more stability.
3. Lookout for Overly Aggressive Terms
A VC in LP trouble might try to jam term sheets out faster, or load on more control rights, just to notch “wins” they can take back to their investors. Many VCs now sell their LPs by showing them how tough their terms are on founders. In other words, they raise capital from LPs by showing them how much of a hard ass they can be.
Why This Resets the Playing Field
Here’s the contrarian take: this LP pullback could actually be good news for certain startups. When tourist capital exits the ecosystem, the money that remains is more deliberate. Deals are harder to close, but the investors left standing are usually more committed to the companies they back.
It also means founders with the right fundamentals, real traction, clear path to profitability, and a disciplined burn, have more leverage than they think.
LPs are telling VCs to be pickier.
That filters down to you, but it also weeds out a lot of frothy competition.
The Bottom Line
If you’re raising capital in 2025/2026, you’re not just pitching a VC; you’re pitching through them, to their LPs. Whether you know it or not, those unseen investors are deciding how much capital flows into your startup’s treasury.
Understand the pressure your VC is under, and you can tailor your approach, negotiate smarter, and protect your runway. Ignore it, and you risk becoming collateral damage in someone else’s fundraising drama.
The money is retreating, at least for now. That doesn’t mean you can’t raise; it means you need to know your prospective investor’s pain points.
In today’s market, the founders who understand LP dynamics will outmaneuver those who don’t. Don’t let yourself be blindsided.
Aaron