Like founders, VCs also raise money from investors, too. VCs also known as “General Partners” raise money from Limited Partners or LPs. In the spirit of Guy Kawasaki’s classics The Top Ten Lies of Entrepreneurs and The Top Ten Lies of Venture Capitalists, we offer The Top Ten Lies GPs Tell LPs. “Lies” could also be read as cliche in this case. Sometimes these are meant sincerely but because so many GPs say them it is hard to tell who speaks the truth. And because some LPs want to be convinced, these cliches perpetuate.
- “Top Quartile Returns” – GPs like to say they have a top quartile fund or are targeting a top quartile fund. As we know from math, only 1 in 4 funds will be in the top 25% in returns. Also, too often GPs will compare unrealized mark-ups to realized returns published for other funds.
- “Proprietary Deal Flow” – GPs often claim to see deals that others don’t. Yet when they help a founder fundraise, they build prospect lists that may be 50 to 100 funds long. Founders in OnDeck today talk about speaking to enough investors to get 100 turn downs. Which is it? Companies only approaching you or pitching to a 100 No’s?
- “Best Network” – We went to Stanford so we have a better network than anyone else who went to Stanford.
- “We Pick Winners”- “Research from Cambridge Associates shows that as an industry, VCs pick winners only 2.5 percent of the time.” and “Horsley Bridge data indicates that, among the top performing VCs, 4.5 percent of invested capital generates 60 percent of their funds’ returns.” (citation)
- “We Are Former Operators” – What they don’t tell you is what their role was, how long they were there and whether the company was an eventual success.
- “We are Thesis Driven” – In reality, many VCs will follow the herd when there is a hot trend. Or write the thesis so that it is broad enough to accommodate many types of investments.
- “We are Sector Specialists” – while the GP may have been deep in the space years ago, now perhaps the GP is a specialist in raising money and attending board meetings.
- “Our Markups are Conservative” – when presenting unrealized gains, GPs will often point out that the markups are based on third-party inputs and imply that means they are solid. This ignores the reality that mark-ups from other VCs on a post-money valuation or even from revenue multiples is not the same as a liquid market for the securities. We won’t truly know what the company is worth in a future sale until it is sold.
- “We Invested in _____ unicorn” – Only so many funds could have invested primary capital early in the big name winner of the moment. Perhaps this fund bought a small amount of secondary shares in Series C?
- “We Add Value” – ask the founders in their portfolio. Sometimes it is true but not often enough.
Thank you to Jessie Jia Guo, Matt McCooe, Taylor Thompson, Katelyn Donnelly and Chris Douvos for reviewing drafts of this post. Mistakes are mine alone.