Interesting post by Bill Burnham. Bill disputes the conventional wisdom that a VC firm's track record is a strong indicator of future performance.
. . . any LP that is making "top quartile performance" the sole reason for making an investment or the litmus test for even considering one is likely making a big mistake. My bet is that in 20 years, outside of few exceptional cases, the VC industry will look a lot more like the mutual fund industry where serial returns are not believed to persist in any significant way.
I disagree with this gloomy prediction, in fact I believe past performance will remain a very, very important factor in predicting future venture capital success.
Bill says the inevitable growth in venture capital fund size will drive down the average quality of deals completed by top tier firms (classic problem for large mutual funds). What inevitable growth? The facts don't back this. Many firms raised jumbo funds funds in 1999-2001, decided this was the wrong model for venture capital, and have recently raised smaller funds. The lesson has been learned and I don't think we're going to see many blue chip firms struggling to place $5 billion venture capital funds.
Second point: brand = deal flow on Sand Hill Road. Mutual funds generally invest in listed companies. It's a level playing field for anyone with an E*Trade account. But venture capital is totally different. The very best entrepreneurs, the proven winners, take their investment opportunities straight to the blue chip venture firms, no one else gets a look. And it takes a stellar track record to break into this self-perpetuating club. Why did DFJ get Skype last year? They got Skype because they're DFJ . . . and the Skype deal alone will probably ensure their fund sits in the top quartile.
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