The Business of Venture Capital, 3rd Edition

12Investment Team Diligence

From any institutional investor's or limited partner's (LP's) perspective, a venture capital partnership is like being locked in a 10-year blind pool — a long relationship in which the investors have very little control, limited ability to exit the relationship, and no clarity of outcomes. Thus, investors seek proven fund managers. Exhibit 12.1 depicts the stacking order of professionals.

EVALUATING FUND MANAGERS

A proven fund manager is one who has generated consistent returns across multiple economic cycles. Few practitioners have demonstrated the ability to source opportunities, invest capital over multiple rounds, add tangible value as a board member, and generate exits. Proven managers do not have to amplify or sell their background, expertise, or scientific domain knowledge. LPs don't really care how they got there as long as they rack up the returns. Rookies eager to enter the business have to establish their credentials.

If a newcomer has entrepreneurial experience — started a company, raised multiple venture rounds, and led the company to an exit — the fundraising path becomes a bit easier. A demonstrated nose for choosing good investments is what matters.

Exhibit 12.1 GP expertise.

“If you belong in the ‘first-time manager/first-time fund’ box, what are the investors going to base their decisions on?” asks Kelly DePonte. Some investors ...