You’re evaluating venture capitalists. What are the most common performance metrics to consider?

Additionally: 1. Talk to the founders of the portfolio companies 2. Find out their deal sourcing methods- Inbound vs out soured 3. Time to close the deal 4. Analyse their portfolio - you might find some insights

When assessing venture capitalists, Funds under Management (FUM) metrics are key. A high FUM growth rate reflects investor trust in VC strategies. Consistent ROIC indicates startup selection expertise. Distribution history unveils exit strategies and profitability. Portfolio diversification and ecosystem impact enrich evaluation. Meticulously analyzing these FUM metrics helps investors align with VCs showing sustained excellence and promising returns.

The number of factors will be many, but the most important factors can be summarized in the following: 1. The number and volume of previous investments 2. The status of previously invested startups 3. VC team 4. VC mentors 5. Satisfaction of previous startups from past investment processes

The most common metrics to look at are Funds Under Management (and growth thereof across funds), Multiple on Invested Capital, Internal Rate of Return and Total Value to Paid In and Distributed to Paid In (which is ultimately the 'proof in the pudding'). But there's lots of nuance. For an LP choosing a VC fund to invest in, it's not simply 'the fund with the best historical numbers across the board on the metrics is the best fund for you'. The larger the FUM the more difficult it is to get higher % returns but in a winner-takes-all market larger funds with greater network effects/unfair advantage can access and support the best deals. The LP's personal preference matters too - some funds win on being disciplined, others win on being bold.

The significance of IRR lies in its ability to quantify the rate of return on investments over time, providing a clear picture of a VC fund's success. With IRR, investors gauge the efficiency of capital deployment, assessing the fund's ability to generate substantial returns. High IRR signals effective allocation and robust exits, while low IRR prompts reevaluation of investment strategies. It serves as a compass for VCs, guiding decisions and shaping future investments. By prioritizing IRR analysis, VCs ensure alignment with investor expectations and pave the way for sustained growth and profitability in the dynamic landscape of venture capital.

"Multiple on Invested Capital" (MOIC), encapsulates the ratio of realized investment returns to the initial capital deployed, offering a comprehensive view of investment profitability. For VCs, achieving a high MOIC signifies successful exits and substantial returns for investors. It underscores the efficiency of capital allocation and the ability to identify promising ventures with significant growth potential. By prioritizing MOIC analysis, VCs align their strategies with investor expectations, fostering trust and confidence in the investment process. Embracing MOIC as a key performance metric propels VCs towards informed decision-making and sustainable growth, driving positive outcomes in the ever-evolving landscape of venture capital.

Incorporating DPI alongside MOIC offers a clearer picture of liquidity and cash-on-cash returns. DPI measures the actual cash returned to investors, providing a tangible sense of a VC's ability to convert investments into profitable exits. This metric, when analyzed in conjunction with MOIC, gives investors a balanced view of both potential and realized gains, highlighting a VC firm's effectiveness in managing and exiting investments.

"Hit rate" evaluates VC effectiveness. It reflects the ratio of successful investments to total investments made, offering insights into the quality of deal sourcing & investment selection. For VCs, a high hit rate signifies a keen eye for identifying promising startups with significant growth potential. It underscores the ability to mitigate risks and capitalize on lucrative opportunities. By prioritizing hit rate analysis, VCs optimize their investment strategies, focusing on ventures with higher probabilities of success. Embracing hit rate as a key performance indicator not only enhances investor confidence but also drives continuous improvement & innovation within the VC ecosystem, fostering long-term success & impactful investments.

The "Value Creation Index" (VCI) measures the holistic impact of investments beyond financial returns, encompassing strategic partnerships, market disruption, and societal contributions. A high VCI indicates not only financial success but also transformative influence and sustainable growth. By prioritizing VCI analysis, VCs align their investments with broader societal goals, fostering purpose-driven entrepreneurship and catalyzing positive change. Embracing VCI empowers VCs to drive innovation, create value, and shape the future of industries, inspiring a culture of impactful investment and meaningful progress.

None of the evaluation indicators are flawless and each indicator has its own strengths and weaknesses. In order of priority VCI (Value Creation Index), followed by MOIC/IRR (Multiple on Invested Capital/Internal Rate of Return), and then Hit Rate should be taken into consideration.

VC firms sometimes sell their holdings/portions to another fund manager. This means that rather than a genuine exit, they pass on some or their portfolio to another VC - which inflates 'apparent returns' without truly representing successful exits via IPO/sale, etc. This has become more common in recent years, as more centaurs/unicorns have been unable (market factors) or unwilling (underwater valuations) to exit/monetise. While on-sales and secondaries and can provide liquidity for VC/investors, these secondary sales do not indicate the same level of success as traditional exits. So, to paint a more accurate picture of how a VC is performing, you need to adjust returns by excluding these on-sale proceeds from the exit calculus.

When evaluating venture capitalists, it's essential to consider a range of performance metrics beyond the commonly cited ones. Other than the mentioned matrices- Investor reputation, portfolio diversity, and the quality of deal flow are paramount. Additionally, responsiveness, transparency, and alignment with investors' goals reflect the VC's integrity and professionalism. Long-term relationships, effective communication, and adaptability to market trends also signify a VC's prowess. By comprehensively assessing these factors, stakeholders can make informed decisions and forge successful partnerships that drive mutual growth and innovation in the dynamic landscape of venture capital.

While the above metrics offer valuable insights, additional factors can provide a comprehensive understanding of a VC's effectiveness. One such metric is Portfolio Diversity, which assesses the spread of investments across various sectors and stages to mitigate risk. Moreover, examining the Quality of Deal Flow and the VC's ability to source high-potential opportunities is critical. Furthermore, analyzing the Network Strength and value-added capabilities of the VC firms can indicate its capacity to support portfolio companies beyond capital infusion. By considering these supplementary metrics, investors can make informed decisions and foster successful partnerships with venture capitalists poised for long-term growth and innovation.

Supporting a portfolio startup as a venture capitalist is natural because VCs aim for higher returns in the future. However, to identify a great venture capitalist, one should observe the support provided to a startup when it's not performing well. Support during tough times is invaluable to founders, and receiving appropriate guidance greatly increases the chances of overcoming challenges. Therefore, it's crucial to analyze the extended support from VCs, especially during difficult phases of the journey.