Beyond track record: the real measure of a Fund Manager

Experience is a real asset for those in the venture business. As an investor in early-stage companies, you want to back serial entrepreneurs. Preferably those that have been successful in the past.??

Success for a founder and CEO of a venture backed company is measurable. An exit with a 5x to 10x money multiple makes all shareholders happy. When raising for their next venture, founders of such successful entities often get close to blank cheques to repeat the success they achieved before.??

But what does “success” look like for the people writing those blank cheques? Can a fund manager’s contribution be measured on a personal level? Is such a thing as an individual track record even real???

“Success of a fund manager should lie in whether the link between their experience and vision remains strong. Not on track record. ”?

A challenge for first time managers?

While in fund-raising mode, new fund managers (the General Partner or “GP”) often lack credentials as an investor and therefore have a hard time convincing parties to invest.??

First time funds need to build a believable story connecting the background of the managers with a clear vision of the investment opportunity. But still, they usually need to settle for smaller (if any at all) commitments and start building investment experience over time.??

Once you raise your second, third or later fund and seek bigger ticket sizes it becomes all about fund track record. Potential investors (the Limited Partners or “LPs”)?want to see endless financial results like money multiples, net and gross, IRR, DPI, TCPI (and dozens of other acronyms), and benchmark these ‘against the market’.??

It's clear that a VC’s track record is a useful datapoint, but LPs habitually use it to feel confident in turning down a fund investment. The future success of a GP should lie in whether the link between their experience and vision remains strong. Not solely on their history of picking a few good bets.??

The drivers for success?

The demand from potential investors to review financial results goes even deeper when looking at the individual track records of the Partners themselves. ?

Partners are often the key people in a fund, and frequently they are supervisory board members with direct influence on their portfolio companies. In other words, they are close to the action, but never the sole driver for success. Managing a fund requires a team, and being on a board is a collective effort to steer a company to success.?

I see many individuals at VC funds claim they or their fund were the primary reason for the success of a company. Often without much supporting evidence other than an exit multiple. ?

Isn’t good support, great co-investors, an excellent independent Chairperson, a stellar management team and a forgiving (hyped) market also needed for success in addition to being present at the right time in the right company???

It is my view that individual track records are overstated as an indicator of future fund success. A clear vision to generate financial and/or impact returns, a true understanding of trends in specific market segments, a focused approach, a relevant network and positive name recognition are the necessary ingredients to drive sustained success in venture capital.??

And it probably helps if the fund manager has made a few mistakes and implements their learnings with the team along the way!?

In other words, don’t focus on track record, but test experience.?

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This article was written by SET Ventures Co-Founder and Partner, René Savelsberg , with input from Head of Marketing, Hayden Young .??