Usual ranking methods
Traditional ranking methods in Private Equity and therefore in VC funds usually involve return performance metrics such as Internal Rate of Return (IRR) or multiples of committed capital. Some ranking lists have the VC firms in order of Capital invested in start-ups, which doesn’t give much of an idea of performance. What is useful to learn from the top ranking VC firms is which start-ups they have their money in. It’s not always possible to copy them, but if you hear of a second or third round of funding and some of the top funds have capital in the company, you should be considering this investment under a different light or as more likely to achieve success. The top ranking funds tend to be the most profitable and more likely to back successful start-ups. This already gives you clues as to how good the chances of the start-up in question are. It does not relieve you of your due diligence process, but it may give you confirmation if you come up with the decision to invest.
Alternative ranking methods
Breaking away from typical ranking metrics are two methods used by industry professionals.
Chris Farmer a venture capitalist, then at General Catalyst Partners, came up with a method he calls InvestorRank. A lot like Google’s page rank which lists sites based on the amount of links it gets from other sites. This method involves considering VC firms by the number of times they are joined in an investment round. If two VCs are invested in a start-up then one follows the other in another deal the VC that invested first moves up in the ranking. The more VCs are joined in an investment the more their ranking increases. This seems to be a way of seeing who the industry leader actually is and the fact that many follow must mean they think that the VC is likely to be getting it right. This should increase the possibility of investing in a winner. However this kind of data is not easily put together or accessed and Chris Farmer has recently started his own VC fund.
I’m going to look at a way of ranking VCs strictly on a performance metric. Cbinsights looks at VC firms and ranks them considering their participation in exits, or IPOs, by number of exits and in dollar terms. It would seem reasonable to conclude that the higher the dollar amount and number of exits the higher the multiple earned on committed capital.
Top 5 Tech funds by exit participation
The list below shows the top 5 Tech VC firms for total exits for two periods; Q1 2009 to Q4 2012 and Q1 2013 to Q2 2015. CBInsight’s list for both periods included VCs that did not make it into the top VC rank by exit in both periods; their totals were lower than the top 5, which had exits in both periods. The aggregate value of companies was much higher for the first period at $207 billion, compared to $137 billion for the second period. You have to bear in mind that the first period saw the giant IPO of Facebook, this company alone was worth $104 billion, the next largest exit came in the second period with Facebook’s acquisition of Whatsapp valued at $19 billion.
Sequoia Capital based in Menlo Park, CA has $3.14 billion of assets under management. The firm currently holds 594 different companies in its portfolio. With a list of successful VC investments that include Apple, Nvidia and Airbnb. Although not the largest in AUM it has an extremely well diversified portfolio and has been consistent in exiting investments with the highest number of exits for the total of both periods.
Accel Partners is an east coast VC, as of 2014 it had $9.6 billion of assets under management, with investments in Europe as well as the USA. It has been involved in some of the most successful start-ups over the past 5 years. Holdings include Facebook, Dropbox, Spotify, kayak all of which have already been brought to market. But the list continues with many more enterprises which may produce more outstanding investments.
NEA New Enterprise Associates also based in Menlo park, CA has risen a whopping $13 billion in committed capital and currently has 872 investments in 530 different companies. This firm also has offices in China and India giving easier access to possible deals in emerging markets. Some of its better known investments include, Evernote, Upwork and Careerbuilder.
Benchmark is based in San Francisco, CA and has raised $1.25 billion in committed capital. This VC has 420 investments across 220 companies. Some of its success stories include Dropbox, Upwork, and OpenTable.
Boston based Battery Venture has a total of $207 million of assets under management, which despite being amongst the smallest has proven to be amongst the top 5 most consistent in backing companies that reach an exit strategy. Some of its investments in well-known companies which it has already exited include Glassdoor, Angie’s List and Groupon.