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Charlie O'Donnell

Theoretically, I buy off on the argument that firms with a history of repeated success can attract top tier teams. It makes sense. If the guys from Google have a new idea after their current success, in all likelihood, they won't be calling up Joe's Auto Body Shop and Venture Firm for the money. That being said, what defines top tier teams? Is prior entrepreneurial success the sole marker of a successful team? Are there not new technology leaders being born everyday, or do the experience-rich get richer and those without a track record of creation destined never to innovate? What about the entrepreneurs themselves? What about when they go out and raise funds? There are too many scenarios that I can envision that could give rise to a new breed of top firms to think that what always was always will be. If a top tier operating group from Cisco decides they want to go out and be VC's, is anyone to argue that they have better inroads to Cisco than they do? Plus... what about the technology itself? Is technology acceptance and purchase a matter of personal connection or does technology win on its own merit?

The other thing I have an issue with is that half of these top tier firms have serious transition issues. Is it the brand that attracts the entrepreneurs or the partners themselves? And what happens when Vinod Khosla goes and spends more time with his family. Does the partnership suffer or does it even matter who calls an entrepreneur from Kleiner, as long as they actually work at Kleiner?

"Putting money with a firm that has consistently outperformed its peers over a long period of time will assuredly be the best bet to make -- assuming you are able to make it." Maybe true, but what is a long period of time? How many firms made their name during the mid 90's period based on companies that may not even exist today? Does performance from the 80's count and to what degree? Do two top quartile funds make an outperformer? Three? If that's the case, how many funds indicate a broken model? There are many "top performing" brand names that haven't had a good fund since the '96 vintage.

In all honesty, I don't have all the answers here... just a ton of questions. The cynic in me believes that what really makes the top tier funds a safe bet is the NY Times Test. Should I find a way to get into the next Sequoia fund, and that fund loses half my money, people would be hard pressed to blame me for making a mistake with that decision ex-ante. Is there such a thing as a smart decision with a bad outcome?

David Hornik

As I say, just because I believe that track record is the best indicator of future success, it does not for a second mean that it is the only indicator. There will be new interesting funds that emerge periodically. And there will be old successful funds that die quiet (or not so quiet) deaths. But I think that you are wrong about the top performing brand name funds not having good funds since the mid-1990's. While the best brand names may occasionally have a mediocre fund (certainly many of the 2000 vintage funds will not result in great returns to investors), they historically have outperformed the rest of the pack by a wide margin.

So why is that? I think it is because by and large if an entrepreneur has a choice between investment from a firm that does not yet have a track record or investment from a firm that funded a Fortune 50 company or two, they'll go with the firm that has succeeded in the past. In fact, I had this very conversation today with a VC friend of mine who recently lost a deal to a brand name firm. He was lamenting that he had spent far more time with the company, had helped them more with their business and, yet, when push came to shove and the company had to pick an investor, it went with the brand name VC over his less well known fund. Whether or not all top tier firms can deliver, the belief is that they can bring in good customers, get good press coverage, bring on good board members, attract attention from influential investment banks, etc. And much of this stuff is true because of the firm's success in the past -- brand name firms do tend to help get good customers because they've funded those customers in the past, do tend to know the reporters at the New York Times, Wall Street Journal, etc. because those guys have written about their successful companies in the past, do tend to bring on good board members because those guys have worked with their successful companies in the past, do have lots of friends at investment because those bankers have made a bunch of money taking their successful companies public in the past, and on and on.

Great VCs will manage to provide the same value to their portfolio companies with or without the leverage of a great brand name. But it is unquestionably easier to do your job when you are sitting at a firm that has a history of success.

Stephen Lin

While a brand name firm can "bring in in good customers, get good press coverage, bring on good board members, attract attention from influential investment banks, etc." doesn't the entrepreneur still need to weigh the increased cost (in terms of equity they have to give up) of going with a brand name?

As you wrote in "It's The People, Stupid!" (March 29, 2004), the most important thing is the people. So when considering which firm to take an investment from, shouldn't an entrepreneur weigh the fact that 50% of a partner's time from a less well known firm is more valuable than 10% of a brand name firm? Or, as a marketer would say, "It's the Brand, young man"?

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Don’t stop blogging! It’s nice to read a sane commentary for once.

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