Does the fund make the VC or VC make the fund?

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JASON LEMKIN

The VC makes the fund, but it’s a little more nuanced than that.

Only 2 things matters for VC until it’s late stage, and maybe even then:

  • Getting the best founders to pick you; and
  • Picking from the best founders that do pick you.

Everything else is just an input.  Deal flow is just an input.  You need enough deal flow so the best founders pick you.  But deal flow alone doesn’t get founders to pick you.  IQ and pattern matching are important, but are just a filter.  Plenty of super high-IQ VCs just criticize A+ deals to death.  Plenty of super high-IQ VCs stay on way past their primes.  In the end, you have to find a way to pick well, period.

So at the end of the day, like most services businesses — it’s mostly about the individual.

If that’s so … how does a “great” fund help?

Three ways:

  • Brand.  Individual brands matter too (e.g., far more people knew Mark Suster than the name of his firm before it was Upfront), but having both a firm brand + an individual brand does help.  Why?  Just like anything else… respected brands are a very imperfect sign of quality, but they are a sign.  Given how many new (albeit smaller) funds have been created lately, one could argue that while important, brand is pretty overstated, or at least, over obsessed on.
  • Collective Decision Making.  There is so much risk in early-stage.  Keeping folks out of trouble, or even more importantly, helping them make the call, can help.  Usually though this only hurts.  It’s very rarely done well.  But in theory it could be.
  • Collective “Closing”.  Done right, having 3-4 partners tell a founder they really want them really does work.  The non-sponsors may play a trivial role post-funding, but having 3 VCs tell you they love you, especially if they are “known” VCs … does kinda work.
  • Better Optimization of the Fund.  Most VCs only allocate 30-40% of their fund to “first checks” into start-ups.  The majority goes into subsequent rounds.  Most VCs don’t do a great job of optimizing how they invest in later rounds, which often are at much higher valuations.  Doing this right can have a very large impact on returns.  Doing it wrong not only directly depresses returns, but it forces you to say No to other good deals you could have otherwise gotten into the fund.   Which is a tragedy.

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Published on September 20, 2015
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