What Constitutes Failure in Venture Capital?

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Essays

Venture capital investors have long feedback cycles (as much as 6-7 years) and extremely unstructured time (one could justify almost any activity as being in furtherance of getting a deal or helping a portfolio company). So, we often look for signals that we are good investors along the way. Hunter Walk said wisely last month to Run Your Playbook, Not Someone Else’s, which got me thinking about this.

Many of these signals are external and qualitative: media coverage, social followings, ‘what people tend to say about you’, etc. Increasingly some of the signals are external and quantitative: Mattermark rankings, Pitchbook rankings, CBInsights rankings, etc.

Internally, investors have signals, too. Surprisingly, though each fund has a way of benchmarking success/failure, there is incredible diversity between the approaches.

One partner I spoke with said that they track every point in their funnel, from “meetings taken” to “follow-up meetings” to “term sheet given” and like to see consistency in their ‘admit rate’ over quarters or years. 

Another partner never looks at the top of the funnel, and only cares about the relationship between “term sheets given” and “investments made”. If they write a term sheet and the company *doesn’t* take it, that is a sign of failure.

Yet another partner doesn’t care about term sheets that are successfully accepted, and instead measures success as term sheets written where the company had at least one other term sheet from a ‘reputable firm’.

And another partner still measures term sheets written where the company, whether the firm invested or not, goes on to raise significant follow-on funding.

Each of these signals reflects the personality of the investor and of the firm, and I often learn almost as much about how a fund sees itself (and intends to fit into the future) from this than I do from its portfolio.

Our signal when I was at Collaborative Fund was: did a company that fit our investment thesis, where we loves the mission and brand, raise capital without us hearing about it first?

I’d be curious to hear other examples of how to create benchmarks, measure performance in venture firms.

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