The VC Field Guide

14Notes for LPs: Characteristics of Some of the Best VCs

Limited partners (LPs) play a critical role in venture capital and there is a lot of diversity in who these LPs are. For example, some folks have been investing in venture for a long time and have seen a lot, have been there for the ups and downs of markets, while others are just getting into investing in venture as a way to diversify their portfolios. But despite the diversity, one of the things I think that's common with LPs is that they often hire a consultant to help with due diligence and qualification of a VC firm. It's too much work, too specialized, and too nuanced for many LPs to figure out whether or not they should invest in a particular VC firm, so they often outsource that to a consulting firm like Cambridge Associates, for instance.

When I think about the diligence that an LP should do to evaluate a VC, the number one thing that is the most important—based on working with multiple other VCs in my career—is sector knowledge. Of course, there are a lot of dynamics that come into play and you can find a VC firm based on financial performance, or how good they are at sourcing, or how sophisticated they are at doing financial diligence and pricing, but to me the most important quality of a VC firm is sector experience. So, how would you apply the VCIF to understand VC firms and, in particular, sector knowledge? The VCIF can be applied to VC firms pretty well.

The Who is the VC team that an LP will invest in, ...