Q: What is the best way to prove you can be a great venture capitalist?
My learnings here are that it’s hard b/c every proxy has its issues.
Basically, you have to prove you can deliver 5x returns — when you haven’t yet. Most VCs struggle to return 2x … 3x puts you in the Top 10% … and 5x is where the outliers live.
So how can you “prove” this — if you haven’t done it?
Route #1: Deliver 5x returns over X years as an angel in over 20+ investments.
This is empirical proof. The problem is this isn’t really Venture Investing. It’s angel investing. You don’t have to follow your investments with subsequent capital infusions; you don’t really have to compete in the same ways VCs do (angel rounds have room for lots of investors); and you have a different risk profile.
So this should count, and it does … but you’ll only get partial credit.
Route #2: Deliver 5x returns over Multiple Start-Up Exits as a Founder.
This too is some sort of empirical proof. But it’s also not really proving yourself as an institutional investor. It turns out the skills to build something from nothing, to success, and then to exit, multiple times … isn’t exactly the same as sourcing and investing in start-ups. Maybe not even all that similar, at all.
Also the founder route has some existential issues. If you’ve really had multiple 5x wins here … then venture economics may not look that attractive, especially when measured against a 10-13+ year fund commitment.
Route #3: Source and close a few deals with Big Exits (5x for all of them) as a Venture Partner.
This would seem to be the next closest thing. The problem here is, you’re really playing with house money (it’s not your call) … and it takes a long time … and you might not even get credit for the deal if it’s successful. Several folks who I know that have gone that route have ended up in the situation where the General Partner then takes credit for the deal.
So, I’m not sure there’s any perfect way to prove it. This gets you at least in the ballpark to have a sense.
It’s a risky hire.