“To hell with them”.

This is what legendary investor Charlie Munger, now 99, thinks about venture capitalists.

In an episode of the Acquired podcast (one of our top 15 VC podcasts), Munger was unreserved in his assessment. 

“You don’t want to make money by screwing your investors, and that’s what a lot of venture capitalists do.”

“You really shouldn’t be in the business of charging extra unless you really are going to achieve very unusual results”. 

He then took a swipe at the personalities the industry attracts. 

“Of course, it’s more easy to pretend that you can get good results than actually get them, and so it attracts the wrong people.”

But it wasn’t all bad.

He did have some complimentary things to say about Sequoia Capital (which has gotten a piece of more home-run deals than any other VC firm in history).

He called Sequoia “the most remarkable investment firm in America”, and that the firm would "run rings" around him if he ever competed in the startup game.

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So, what do you think?

Does he have a point?

Is he too far removed from the startup game to truly appreciate its nuances?

It’s orders of magnitude harder to pick early-stage deals where limited financial information exists relative to, say, a publicly traded company.

Heck, oftentimes early-stage businesses are yet to settle on a product, business model, or go-to-market strategy.

But the reality is, as we’ve pointed out previously, the best VC brands get the best deals, and with that, capture most of the returns. 

According to Cambridge Associates, top quartile funds generated market-smashing returns for the period 2009-18, below.

But you would have been better off putting your money in a low-fee Vanguard S&P index fund than a bottom-quartile fund.

Historically, 50% of venture funds have failed to return 1X of their investor’s money. 

So while we might hearVCs calling the asset class the best performing of the past quarter-century, this simply isn’t true when you look at the average returns across all funds, as opposed to cherry picking high-performers.

Cambridge Associates found that the average annual return for venture capital investments over the past 20 years was 11.8%, versus 12% for the Nasdaq Composite - which again, you could have gotten a piece of with an index fund, minus the 2% management fees, illiquidity, and sophisticated investor accreditation that comes with VC investments.

So, what do we do with this information?

If we look at our analysis below, we see that top brands historically and overwhelmingly have gotten a piece of the best deals. 

Is this a function of picking?

Is it a function of helping them grow?

Perhaps, to some degree. 

But if you’re picking from a weak pool, you will get weak results.

If you’re coaching and connecting weak founders, you might get mediocre results at best.

Every VC will tell you - they invest in people above all else, because ideas evolve and challenges arise, but the best operators will move hell and earth to find a way.

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Deal flow is (almost) everything

Without access to quality deal flow - most venture firms are destined to wind up in the graveyard of firms failing to beat over-the-counter index funds. 

If you’re an emerging fund or a lesser-known firm, how can you stand out in a world of Sequoias, a16z, and Bessemer Venture Partners capturing most of the returns?

We’ve found that the top brands have not only cultivated their names through decades of on-the-ground efforts, but through content.

This is evident in the web traffic of these firms. 

However, we’ve also found that newer high-performing firms, those that have been in the game for 10 years or less, have also made content a significant part of their brand-building and deal-flow generating effort.

Australia’s Blackbird VC and AirTree Capital are two firms that for lack of a better term, go hard on content. 

And they’ve generated an IRR of 53% and 49% respectively on their funds, after ten years in the game. 

Similarly, New York’s FirstMark has made content and events central to its identity (see our analysis here) and its first fund generated a net IRR of over 36% according to Preqin.

These numbers put Blackbird, AirTree, and FirstMark among the top-performing firms in the world. 

Should your firm be doing more to attract quality deal flow?

Here are some approaches to consider.

1 Content

Maintaining an active online presence through a slick website, social media, and content marketing can make it easier for firms to build a reputation, cultivate relationships, and generate inbound dealflow. 

2 Thought Leadership

Establishing yourself as a thought leader through industry reports, research papers, guest posting, media appearances, podcast appearances, and speaking engagements can attract attention and establish credibility within the startup ecosystem.

3 Niche Focus

Focusing on specific industries or sectors can help VC firms become known as experts in those areas, making them more appealing to startups operating within those niches.

4 Network Effect

A geographic or sector focus can make generating network effects easier. Attend industry events, collaborate with other investors, and maintain relationships with successful entrepreneurs. For more on network effects, check out a16z partner Andrew Chen’s book The Cold Start Problem. 

5 Accelerator and Incubator Programs

Running or partnering with accelerator and incubator programs can provide early access to promising startups and help mentor and groom them for investment. However the failure rate of startups at idea-stage accelerators is super high, and oftentimes these programs serve the accelerator more than the startups. 

6 Strong Team and Advisors

Assembling a team of experienced and well-connected professionals can enhance a VC firm's ability to source deals. Having a diverse team with various backgrounds and networks can be advantageous.

7 Outreach and Scouting

Actively reach out to potential investments, attend pitch events, use scouting platforms and databases such as Crunchbase or Pitchbook, and browse public code repositories like Github for popular projects.

Final Thoughts

For what it's worth, I don't necessarily agree with Munger's sentiments. VC is a hard game. It's worlds away from picking public market equities with set-in-stone business models, and decades of publicly available financial and operating information.

And if VCs don't back the next generation of game-changing founders with a dream, conservative public market investors are unlikely to. And the world will stand still.

But it's precisely for this reason that VCs owe it to investors, founders, and the world at large to do everything they can to get access to the highest quality deal flow, and give themselves the best chance of becoming a top quartile fund and generating returns worthy of their high fees.

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