A word of advice to venture capitalists raising a new fund: Don’t blame your worst performing deal on a partner who’s now dead. And, if you do blame a dead partner, make sure it’s not someone who died two years before you made that investment.
That was one tip limited partners laid out for VCs during a panel on venture due diligence at the Venture Alpha West conference last week in Half Moon Bay, Calif., which was presented by Thomson Reuters (publisher of VCJ).
Speakers also warned VCs against relying too heavily on their preferred references. LPs will also reach out to the entrepreneurs and co-investors who partners didn’t recommend. Also, don’t expect to explain away poor performance by attributing it to a strategy you’ve now abandoned. Losing a half-billion-dollars on cleantech growth investments will still reflect poorly, even if you’re no longer doing those deals.
Most of all, LP speakers stressed how important it is for venture capitalists to accurately attribute credit and blame. To do otherwise represents a grave breach of trust. Additionally, several noted, there’s a high likelihood of getting caught.
“There are a lot of people highlighting successes and returns they had no part of,” said Brian Bank, director of private equity at Aspirant, a wealth management firm for high net worth individuals and families. By the same token, VCs have been known to cast blame on people who don’t necessarily deserve it. (The story about the dead partner responsible for the bad deal, for instance, was something that actually happened, he said.) Most of these things are rather easy to verify, which makes misstatements all the more foolish.
Attribution is particularly important for larger, established firms with partner turnover, said Kevin Campbell, portfolio manager at DuPont Capital Management.
It’s unwise for LPs to be “blindly investing in brand,” he said. Thus, before investing in an established venture firm, it’s crucial to determine whether the partners most responsible for its best performing investments are still working there. LPs also want to figure out whether new partners and principals are generating deal flow and helping build successful companies, since these are the people who will be leading the firm in the future.
Among VCs, attribution isn’t as simple as extending kudos to a particular partner for a successful deal. Certainly it’s easy to show which partners sit on which portfolio company boards. It’s harder to extend credit for sourcing a deal, or determining how much of a successful investment is due to the partner who led the deal or to the partnership as a whole.
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