Raising Money From Top Tier VC Firms Means Less Than You Think

http://alexstechthoughts.com/post/55694706169/raising-money-from-top-tier-vc-firms-means-less-than

by mschonfeld • 13 years ago

16 7 13 years ago

ironchef2• 13 years ago

I would suggest if you're simply looking at VC firms as a means to get financial capital you're ignoring a large amount of what they can do for you.

Ataub242• 13 years ago

The post is more about the obsession with getting top tier VC names in your round rather than finding a specific investor from a less popular VC or investing fund that gets your biz better. Investors can be great and helpful- but in the end of the day don't obsess with getting a specific name on your cap table- obsess with building a great company.

ironchef2• 13 years ago

Sorry... part of what I was implying is that the top tier VC firms often have a lot more to offer in what would help to build a great company (better talent networks, better advising, better ins with potential customers, etc).

That isn't to say you should obsess with them; however, if the chances are higher that they'll help you build a better business than you probably should pursue them.

7Figures2Commas2• 13 years ago

I can see it now: a venture firm with the slogan, "Taking the capital out of venture capital."

Back to reality. Any entrepreneur raising capital from a venture firm should recognize that venture capital returns over the past decade lag all of the major domestic stock indexes by a substantial margin. If you look at returns from even the most successful of funds, there's usually not a lot to be impressed by. In some cases, one or two investments account for most of the returns.

Why does this matter? Simple: it strongly suggests that the value-adds so many of the firms try to differentiate themselves with can only do so much to produce real value. If this wasn't the case, you'd expect all that special sauce of the top firms to ultimately be reflected in their returns, which again are generally unimpressive.

There is an excess of capital in venture capital today, and you have lots and lots of firms chasing deals. The wisest entrepreneurs who need funding will take advantage of this to raise capital on the most advantageous terms they can negotiate. Agreeing to less favorable terms based on the pedigree of the source of the funding is unlikely to confer any benefit.

CyrusL• 13 years ago

If you look at returns from even the most successful of funds, there's usually not a lot to be impressed by.

That's not correct. The top funds have very high IRRs. For example, Foundry Group on slide 5: www.scribd.com/fullscreen/57221228 . I remember Marc Andreessen describing A16Z's first fund as returning >100% IRR. I'm sure SV Angel's is very high as well.

In some cases, one or two investments account for most of the returns.

That's not at odds with a fund being successful. Startup investing is inherently about finding outliers: http://www.paulgraham.com/swan.html . Its alright if the median investment returns nothing as long as an outlier can return the entire fund. You might disagree with an entrepreneur aligning herself with investors that have this sort of thesis, but it's not accurate to say that the top funds perform poorly as a result.

Raising Money From Top Tier VC Firms Means Less Than You Think

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