The Myth of the Top Investor

Someone asked me recently if they should raise a fund, because they had access to investments that were being made by "top, brand name investors".  

Whether there even is such a thing relies heavily on your perspective.

It is absolutely true that many of the firms you've heard of being called the "top" funds consistently perform in the top quartile, even decile, of all funds, over time--Sequoia, Accel, etc.

If you drill into that data, what you wind up seeing is that they get a disproportionate access to many of the "once in a lifetime" type exits--the Facebooks, Whatsapps, Googles, etc.

They do not, necessarily, have a better than average winning percentage.

So what does that mean?

It means that if you ever have an opportunity to be a Limited Partner in Sequoia, and to do so over multiple funds--with a very long term (20+ years) time horizon--you should probably do it.  A few home runs over time will likely net you huge returns in the end.  

What doesn't it mean?

What it doesn't mean is that by co-investing with them, you're guaranteed any success.  For one, the sample size is far too small for you to have that much more of a chance of being in those one or two deals.  Unless you're doing lots and lots of deals, your own chances of being in one that hits is far too low for it to make a difference whether Sequoia is in one of them.  In fact, there's a good chance that if you're an average Joe and they're in your deal, they might not be showing the same kind of conviction in this opportunity they would if they were trying to take the whole thing.

It also doesn't mean that, if you're an entrepreneur, they're the right partner for you.  Much like those damn Yankees, these winning franchises have had a number of employees come and go over the years, many of whom weren't so good at their jobs.  On the Yankees, for every Derek Jeter, you had a few Bubby Crosbys.  So you might get a top partner on your deal at one of these firms--someone who is responsible for the kinds of multi-generational wealth creation kinds of deals, or you might get someone who is relatively new, or simply has yet to prove out their Midas touch when it comes to investing.  

Perhaps the investor you're turning down is the next pre-Twitter Fred Wilson.  Was Fred a "great" investor before Twitter, or did the experiences and network that he picked up in that deal put him into an elite class?  Probably a little bit of both--but he certainly didn't have the same kind of brand beforehand, and I'm sure lost a deal or two to "top" firms because of that.  

In fact, most investors would agree that as a founder, *you* are the one that creates the value.  You may decide you want Benchmark in your round for signalling purposes, because you know they're seen as successful, but you would undoubtedly be just as successful no matter who you took money from.

Does Harvard make smart kids or do smart kids want to go to Harvard?  Would they have done just fine anywhere else?

On top of all this, these "top" firms aren't the only ones who get into these top deals.  Given the size of these funds, they often don't participate with more than a token amount, if at all, in the seed rounds of top returners.  They simply can't manage deals that small on a regular basis because of the time and effort for the amount of money at stake.  So, from a fund perspective, there are certainly other funds that do just as well in a given cycle.  

Lastly, it takes a long time and many many funds to tell whether or not the funds that we think of as top are actually top performers--and even then it's not clear that they're built to last several generations of partners.  

There are some funds that, in the last seven years, have raised four or five funds.  We're *just* seeing whether or not their first fund is a good performer now and now they're managing a fund that is perhaps five to ten times larger than that original size.  For all we know, the three or four funds after that are complete clunkers.  Deals look great until they aren't anymore--Theranos, Fab--these are the kinds of opportunities that enable you to raise another fund or maybe even two because of the on paper returns.  They may or may not win out in the end.

To say that a firm is a top performer when they started out with $50mm and are now managing $500mm or more seems ludicrous to me.  It's a completely different game at that size, and the work being done is likely now spread out across many more people than just the original partners who made that first fund successful.  On top of that, they probably did nothing in that first fund other than invest.  Now, they're spending a lot of time managing staff, going to board meetings--and much less of their time is spent sourcing and investing.  

There's also a difference between "top" and "brand name" investors.  There are lots of investors who have built brands in the last few years--names of people that we may associate an exit or two with, but whose full track record we really haven't seen.  A lot of times, their record is two early to tell and other times, it may not be all it's cracked up to be.  Also, it could have been just dumb luck that isn't likely to be replicated again.  Is every Uber angel investor likely to be the finder of the next big deal?

So before you start aiming to work with or follow "top" investors, think long and hard about what you're getting yourself into and what you're likely to experience.  There's a lot of star power in the venture capital world right now around both individuals and firms--and everyone is trying to convince themselves that getting closer to the light will cause some to shine on them, too.