If you are a family office or an accredited investor and looking to diversify your investment, here are the brutal facts you should look at when choosing a Venture Capital (VC) as a Limited Partner.
There are a lot of Venture Capital firms popping up around the work, to close a funding round from L.Ps and start deploying the capital into high-growth startups.
A track record is one of the key metrics that make the decision-making process easy.
However, what else?
I argue there are a whole bunch of other metrics that you need to look at when deciding on which VC to invest in.
Let's deep dive.
There are not enough good companies out there to justify the number of venture funds in existence.
Only great ones survive.
It used to be a requirement for VCs to have company-building experience, but that has gone away as more funds have popped up.
Not a deal breaker. I would argue that investing as a VC into startups has a different skill set vs. building a startup. But it will be great if you have a few builders within the VC.
The best founders spend the least time fundraising. If the VC make their diligence process a burden on the founders, they lose good deals.
VC Twitter is the best place on the internet. See what other L.P.s say about the VC over there.
You'll constantly hear the line "Where can I be helpful?" Find good deals and refer them to your VC. Be proactive.
See what makes this VC interesting for founders. If they look like all other VCs, not a good fit for your investment.
Everybody in VC claims to want to be your friend. It's up to you to figure out a) who you want to work with and b) who you can actually do business with.
Having your money locked up for 7-10 years is not ideal, but always remember why you made this investment in the first place.
It is way easier to 3x your money at a $10mm fund than it is at a $100mm fund.
Over the past five years, I’ve known many funds that have invested based off of hype alone. No diligence, no reference calls, no thought-out thesis - only an expectation that somebody else will bid higher in 12-18 months.
See if the VC is leading investments or just a follower.
The VC tech stack for nearly every fund is ironically horrible.**Spreadsheets and email is the standard.
Don't work with them! Just like dodgy startups, avoid dodgy VCs. VCs will not invest in startups with dodgy tech stacks. Feed them from their own spoon!
Building an audience is overrated. Building a skillset is underrated.
VC's mission is not to create jobs. It is to multiply your investments. The fewer analysts and associates the better and more efficient.
The larger the fund, the more focused their job is on sourcing. The smaller the fund, the more they'll have to be a jack-of-all-trades.
Most of the smaller VCs are glorified business development reps.
Proprietary deal flow is a myth.
VCs make a lot of people rich.
If you want to work directly with founders, you’re better off investing an actual startup.
Selling to VCs is incredibly difficult. These people are some of the most selective people in the world, and they say "no" for a living.
Spray-and-pray seed funds do more harm than good to companies that require large amounts of capital. If a fund isn’t able to follow on into the next round of funding, it sends a bad signal to other investors.
Most VCs are extremely lonely in their day-to-day. Small teams and saying “no” all day will do this to you.
VCs have to focus on content all of the time. The argument is that more content makes them more discoverable, however, is one of the best funds to ever exist, and their website looks like this.
The best companies want to work with the best brands of investors. If your VC isn’t a tier one or tier two fund, VC has to figure out another way to get startups. So, they better have a great business development strategy.
Seed and pre-seed investing is all based on narrative. Many VCs raise money to fit into the telling narrative (web3 in 2021, creator economy in 2020, fintech / embedded finance in 2018 / 2019).
Venture Capital is a branding game. VC can only earn your brand through building a track record or being loud on the internet. Which of these options do you think LPs prefer?
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