Thoughts on LPs & Non-VC calls

     Last week, I had dinner with Larry from GM and he asked me a question.  Now that I'm on this side of the table, what am I learning about how VCs work that would help an LP better assess the groups they were going into?  Admittedly, I've only been here about a month, but one thing has become very apparent to me.  At GM, we thought a lot about how to diligence a network and it always proved very difficult.  One could extrapolate that some VC who spent a few years building Stratacom obviously had some kind of a network, but a lot of people worked in that organization.  How could you really tell who still had live contacts and what did they mean?  Reference lists?  Well, most LPs ask for reference lists and get back a list of CEOs and other VCs.  Both, to be honest, are pretty poor samples.  Every CEO uses their board differently, and a lot of the CEOs weren't even at the company at the time of the initial investment, so they're not going to give you a lot of insight into the investment process.  Its good to hear that a VC behaves well on a board and adds value, but you also want to understand how investment decisions actually get made as well, and the insight into that is tougher to come by.  As for other VCs, I've never heard of a VC bashing another VC.  At worst, they won't comment.  That's not entirely helpful. 
     Perhaps the most important contact that no LP ever asks for is the "first non-VC call."  No VC can possibly know every single little detail going on in every niche that they play in.  They need to rely on an active network of practitioners and experts that they rely on to get a "first read" on a new technology or a company.  It might involve setting a company up with a potential customer to get feedback on their product or their pitch.  Sometimes, its just a market call from an experienced entrepreneur already in the trenches.  Either way, understanding the quality of the "network in the field" and how a VC uses that network is key to understanding how a VC wades through their opportunity set.
     At USV, if we're looking at a new online advertising technology, I know who we'll probably call not just for market intelligence, but to feel out the team/entrepreneur.  Its also a great test for a company we're interested in to send them to someone that we know that they can pitch their wares to, so that we can get the feedback afterwards. 
    If you're an LP diligencing a fund, you want to know who those first calls are.  Ask a VC what the four or five areas that he or she is most interested in at the moment, or the spaces of the last four or five deals that got past their first screen.  Who were the first non-VC, non-customer diligence calls?  Who did they call for the quick market read?  Did your VC just look at an RFID deal for supply chain?  What manufacturer did he call to see if the technology was applicable?  Is that a contact the VC goes to often?  Is the contact a real decision maker?  Do any other VCs speak with that contact? 
Often times, the quality of a quick read market call is going to depend on the quality of that first non-VC call on a deal that passes the first screen.  That's not someone who shows up on your typical VC/CEO reference list, but they're obviously key to the deal process.