TLDR:
An institutional investor is a large organization — such as a pension fund, insurance company, endowment, or mutual fund — that pools capital from many individuals to invest in securities and other assets at scale.
Institutional Investors’ Role in Startups
Institutional investors bring far more than capital to startup ecosystems. Sovereign wealth funds, university endowments, pension funds, and insurance companies serve as the limited partners that fund VC firms, giving venture capital its ability to write large checks into high-risk companies. When institutional investors shift their allocation to or away from venture capital as an asset class, they amplify or restrict the entire ecosystem. The 2021-2022 cycle illustrated this dramatically: a surge in institutional LP capital inflated startup valuations, followed by rapid LP pullback that caused a sharp contraction in VC activity and startup valuations.