Whats the right way to think about a new VC fund?
There is only one question that matters when deciding whether to invest in a venture capital fund: why would a founder care about this fund? If you understand why this is important, stop reading now. If you are interested in learning more, see the few bullets below:
Venture capital is a power law driven, extremely constrained asset class. What this means is the best founders and the best businesses can raise capital.
Maybe it takes some time, maybe it takes the right introduction but the market for venture capital is rapidly becoming more efficient.
The world is getting smaller and access to capital is getting wider. (To be clear I am not arguing that its perfect, just that its better)
So, when you have an exceptional founder or an idea who’s time has come, why should a founder take one person or firms check over the other?
Sequoia, Benchmark, Founders Fund and others, have an answer to this. They are former operators and have done this many times.
New VC’s can’t make this entire pitch. So they have to make the argument that:
They will invest before others.
They can help with a specific problem.
There is a long standing relationship, so its a friendly situation.
They can help a ton with later stage financings.
They can help get customers.
If the founder doesn’t care, cuts that person back or thinks they aren’t worth the value, that fund won’t perform.
So, if you want to understand how good a VC will be, start with the founders.