Our Tech IPO Pipeline Report identified 472 tech companies with valuations greater than $100 million. It also detailed the top investors in Tech IPO Pipeline companies providing a view into which VCs are best at investing in tech’s high fliers. After we highlighted the Top 10 investors, we received a couple of comments to the effect of “any fool can write a check”. The obvious undertone of this was that a mere count of the number of Tech IPO Pipeline companies in an investor’s portfolio doesn’t normalize for investment activity or risk and could just reward VCs who write lots of checks. And while we don’t think that criticism is particularly warranted or accurate with this set of investors, we thought we’d take a look at how the rankings look after normalizing a bit for factors such as financing activity and risk. Our aim is to provide a metric and view into which VC is actually best at identifying and investing in future stars.
As a quick refresher, the top 10 VCs based on sheer quantity of IPO Pipeline companies in their portfolio is given below and was led by Intel Capital and Sequoia Capital who tied for the top spot followed by New Enterprise Associates (NEA) and Accel Partners.
Data Integrity Note: While Goldman Sachs was included in our Tech IPO report as a top investor, the firm was excluded from this analysis of VCs given it’s not a venture firm.
Dividing the number of tech IPO companies in each investor’s portfolio by the # of investments each firm has made over the last three years serves to normalize the rankings a bit and develop what is effectively a “batting average” for each investor. This metric is herein referred to as the “Investor Effectiveness Ratio” or IER.
Based on the IER, we see the rankings shift pretty significantly with Institutional Venture Partners and DAG Ventures jumping to the top 2 spots and NEA falling from #3 to #10.
The IER alone, however, doesn’t tell the whole story as it doesn’t adjust for risk that the investor is taking which can be assessed by analyzing the stages of companies that an investor backs. And so on its own, it rewards IVP and DAG who make relatively less bets and who also invest in mid- to later-stage companies.
To understand the stage of companies an investor is investing in, we looked at Investor Analytics on CB Insights. So for example, Investor Analytics reveals that Institutional Venture Partners invests primarily in mid- to later-stage financing rounds (translation: less risk).
Conversely, if we compare against Accel Partners, we see more of a focus on earlier stage deals (almost 40% in Seed/Series A) as evidenced below in the stage of investment visualization from Investor Analytics.
Analyzing all 10 investors by stage of investment, a clear distinction emerged between DAG Ventures and Institutional Venture Partners (IVP) and the rest of the pack in terms of the riskiness of investments they are taking and the quantity of deals they’re doing. Both DAG and IVP are generally investing in mid- to later-stage technology companies as this is their strategy. As IVP writes on their website, they are a “later-stage venture capital and growth equity firm”.
Interestingly, using Investor Analytics, we also see that IVP and DAG Ventures actively co-invest alongside many of the other top firms as can be seen below in this investment syndicate visualization for DAG Ventures where we see that their top 4 syndicate partners are other top IPO pipeline investors.
IVP is not all that dissimilar from DAG in that 3 of its top 4 investment syndicate partners are from among the Tech IPO Pipeline elite. So DAG and IVP’s strategy is to invest not just in mid- to later-stage companies but to often follow the earlier investments of top investors.
Note: Given DAG and IVP have a different investment profile than the others who invest across the stage spectrum, they were removed from the risk calculation below and so are indicated as NM (not meaningful) in the remainder of this analysis.
Once we’ve removed DAG and IVP from the analysis because of their strategy difference from the rest of the firm, we turned to thinking about how do we risk-adjust the IER. In its current form, as detailed above, the IER relies on the total number of investments a firm has made in the last 3 years and so firms that make smaller bets on a larger number of early stage companies get penalized despite generally putting little capital at risk and owning more significant portion of future potential IPO candidates. So to mitigate against this, we developed a Risk-Adjusted Investor Effectiveness Ratio which seeks to (1) reward investors who invested early in Tech IPO Pipeline companies and (2) not penalize investors who make many investments (seed deals for instance).
The investor ranking using the Risk-Adjusted IER moves things further as Sequoia Capital overtakes Intel Capital as the top investor for Tech IPO Pipeline companies.
All the changes among the top 10 are detailed below. Based on the Risk-Adjusted IER, we see the biggest gainers from our initial ranking are Menlo Ventures followed by Greylock and Benchmark Capital. The biggest drop was for New Enterprise Associates which fell from 3 to 8th spot followed by Kleiner Perkins which dropped from 5 to 7.
With the Risk-Adjusted IER, we have a useful proxy (and what will eventually become our version of baseball’s On-Base-Percentage (OBP)) to evaluate the effectiveness of a venture investor in identifying and investing in future winners. We’re working with several LPs who are using this to analyze venture investors so if you’d like to discuss or if any questions, don’t hesitate to reach out.