Venture Capital Fund Due Diligence
The top tier of VC funds represent one of the highest performing asset classes in the world. The bottom 75% lose money consistently and tie up their Limited Partners’ capital for a decade.
Distinguishing between the rare top-decile winners and the legions of dangerous money-traps is more difficult than simply looking at past performance. VC fund pitch decks are from from easy to decipher, with multiple frameworks employed to demonstrate success and many counterintuitive metrics which can turn out to be red flags.
As former VCs ourselves, we speak the language and can help you cut through the investment prospectus to find out whether a fund has what you’re looking for.
Just as when looking at a startup, good VC diligence starts by looking at the founders – or in this case, the GPs. Your general partner needs to share your values, be interested in what you’re interested in, and have a track record of making money while doing it. They are also stewards of your capital, and need to have demonstrated their ability to steward other money in the past – either as a GP at a previous fund or as a venture-backed founder or business leader. We employ the same technique here that makes our startup diligence so unique: calling other investors. We talk to LPs in the current fund, previous co-GPs, previous LPs, and founders who have taken their money. Eventually, a rich network of data points assembles itself to indicate risk/reward and interest-fit on a more granular level.
Performance numbers are so opaque in venture capital that it’s difficult to decipher returns even for experienced investors. We re-build the VC target’s financials from scratch using deal documents to get a consistent set of numbers for our clients to evaluate. Everyone calculates IRR differently, especially in early-stage funds where exits are scarce and much of IRR is made out of uprounds which have only realized gains on paper. Once we have the target VC’s performance pegged to industry benchmarks using trusted numbers, we can start to compare apples to apples.
The target VC is a place to start. You may have a personal connection to them, or you may have come upon them by reading their thought leadership. Now that we know what they’re like and how they perform, we can look at alternative options that fit your investment criteria as well or better. Even if the target ends up being the right fit for you, your knowledge of the ecosystem will trickle down into your ability to be a better LP. You’ll know the relevant exits in the sector, you’ll be familiar with future co-investors, and you’ll have a deeper appreciation for what your GP has been able to accomplish in the space about which you’re passionate.
Jourdan has an old man’s wisdom alongside a young man’s energy. Though he is much younger, I often turn to Jourdan for the benefit of his clear thinking and his shockingly deep knowledge on many topics. I’m surrounded by smart people, but Jourdan is a singularity.
Mike Edelhardt, General Partner, Social Starts VC & Joyance Partners | $85M funds under mgmt
Jourdan and his team brought rigor to our diligence process. As a result of their work, we were able to make smart passes on a few initially tantalizing machine learning opportunities. We later contracted with Brandt & Co. to conduct product workshops with 2 portfolio companies, which were fruitful and well received.