​Does Experience Actually Matter in Venture Capital?

Adam Root |

After your car breaks down, you take it to a mechanic who's spent years under the hood. When you build a home, you choose an architect who's constructed entire subdivisions.

But what about when it comes to venture capital? When you hand a VC money to invest, don't you want him to have been in the business for decades?

Surprisingly, no. In fact, when the Kauffman Foundation analyzed its own venture portfolio in 2012, its 2006-2010 vintage funds — its newest class — performed better than the 2001-2005 or 1996-2000 vintages. Over 38% of its youngest funds beat public markets by 3% or more, compared to just 9.5% of the 2001-2005 crop and 16.6% of the 1996-2000 group.

Why do older funds tend to post poorer returns? In short, their GPs tend to follow old-school rules of venture investing. They were taught to invest a little bit in a lot of companies and double down on those that show traction. The entire operation rides on one person's ability to pick a few moneymakers out of thousands of potential companies.

New fund managers are trying to change that. But venture capital, an industry that prides itself on discovering business legends like Steve Jobs and Mark Zuckerberg, is woefully dismissive of new blood. What new VCs lack in investing records they often make up for in experience as entrepreneurs themselves. Most importantly, they see how broken venture capital is, and they want to fix it.

First-Time Fallacies

Still not convinced that you're better off investing with a newbie? Let's put a few misconceptions about first-time fund managers to rest:

1. “You need a track record to make an investor money.”

Bullshit. Do you know why the federal government requires funds to warn investors, "Past performance does not predict future results"? Because past success does not predict future success!

In fact, according to investment research firm Preqin, first-time funds have consistently outperformed more established ones since 2000. Seasoned partners at big funds get big heads, assuming their gut is always right. In the meantime, the rockstars are jumping around to join newer funds, which are using new technologies like machine learning and AI to inform their investments.



Why are the newest managers — and, admittedly, a few enlightened older ones — interested in those technologies? They're listening to the deluge of studies showing that data-driven companies financially outperform their peers. Cherrypicked wins do not matter; data-based deal selection does.

2. “You need to have a degree from a top 10 business school.”

Wrong again. Yes, financial modeling and accounting skills are valuable, but early-stage startups don’t behave like public markets. They’re messy and run by founders who are still finding their own footing.

That's why you're better off selecting a fund manager who's either worked at a startup or founded one himself. He's been there, done that, and can roll up his sleeves to do the job regardless of what his diploma has to say.

Just look at VC VIPs Will Poole, Dave Richards, and Jack Knellinger and their fund, Capria Accelerator. When these tech guys took a try at venture capital, they struck it big with their funding-for-accelerator-training model. Now, they're aiming for an even larger play: a $100 million "fund of funds" that will give $5 million a piece to its top teams.

Capria makes it clear: If you want unconventional returns, you need to find partners who think differently.

3. “You need to choose a fund manager with an expansive network of proven founders.”


Nope. In fact, this could actually hurt you when it comes to your returns. Proven founders command big checks early and less-than-favorable terms from investors, shrinking limited partners' share of the pie. First-time fund managers, on the other hand, have insatiable appetites to win and are willing to listen to up-and-comers.

Take one of our holdings, Rantt, for example. No one would hear its founders' pitch, let alone invest. We sat down to the negotiation table willing to listen. We took a chance, and since last December, Rantt has grown month over month by triple digits. Its founders were unproven, not the greatest pitchers, and without other investment prospects. Yet they're crushing it. If that's not enough to prove typical VC logic wrong, I don't know what is.

Will first-time fund managers sometimes get it wrong? Sure. But the industry needs brave rookies willing to strike out. Unless family offices, endowments, and pensions give them the chance to innovate — and, yes, sometimes fail — we'll be talking about the same problem in 2050. And I, for one, believe we're better than that.

Adam Root is a founding partner at Tricent Capital, a venture capital firm based in San Francisco that uses proprietary algorithms to select startup investments based on data rather than emotion. Adam supports Tricent’s portfolio companies by mentoring executive teams on software engineering, user experience (UX), marketing, sales, and customer service.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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