On Friday, June 27th, I presented at the 500 Startup PreMoney conference in San Francisco. It was an outstanding event.
The presentation I gave was entitled “The Micro-VC, Angel Investor and Corporate VC Leaderboard: A data-driven look into assessing investor effectiveness“. Besides having what is probably the longest title of any presentation, it was also probably the most depressing. Click here to get the presentation.
A video of the talk is below. Notes for the talk are below that as well depending on what is more useful to you.
If you cannot watch the video, the narrative is probably mostly evident from the slides but below are my slide by slide comments to fill in any gaps. If you have questions on any aspect of this, tweet @cbinsights with your questions.
Slide 1 – Title page
Slide 2 – Introduction to CB Insights
This is what we do. Better than anyone else.
Slide 3 – Customer Love
A lot of very smart people use and love us.
Slide 4 – The Scene is Getting Crowded – The Micro VC Glut
At the early stages, it is getting crowded. Scott Kupor of Andreessen Horowitz and Mark Suster of Upfront Ventures both spoke about this trend at the beginning of the conference. There are lots of small funds being created.
Over the past six months from Nov 2013 to April 2014, almost-half of the 129 funds closed were micro-VCs (AUM of < $50M) while 65% were $100M or less.
This will be good for lots of startups but there is ultimately overcapacity at the seed micro VC stage.
The trend is not specific to micro VCs. There is also an oversupply of accelerators and angels at the early stage. And here is the reality.
Slide 5 – Lake Wobegone
Most of the discussion by accelerators, angels and micro VCs is punctuated by lots of confidence. The narratives often sound compelling but as LP Fred Giuffrida of Horsley Bridge said at an earlier session, most micro VC pitches are largely undifferentiated. It’s usually a former entrepreneur who had some success and then did some angel investments that did moderately well and who now wants to manage a fund.
And despite the narrative and cherry-picked anecdotes, not every micro VC, accelerator or angel can be above average. And it’s likely that the return characteristics of these early stage investors will resemble of VCs overall which we’ll discuss shortly.
To emphasize the heterogeneity of the micro-VC group, let’s look at one simple measure of effectiveness. How do micro-VCs do when it comes to getting their seed investments follow-on.
Slide 6 – Not Everybody Can be Above Average….
One of the important ‘value-adds’ of a micro VC is the ability for it to help its portfolio companies raise follow-on financing. But the data shows that most are not very good at this.
When compared to multi-stage and hence larger VC funds who do seed deals, seed deals have a much lower rate of receiving follow-on investment than the seed investments of multi-stage VC funds. This, of course, does not work well within narrative that seed investors perpetuate around signaling risk if you take seed VC dollars from a larger fund, but again, the data doesn’t lie.
The main point to take away from this is there is no structural or fundamental advantage of being a Seed VC fund or even an accelerator or angel. Like in asset classes ranging from hedge funds to mutual funds to traditional VC investment, there are a very few great investors, a handful of good investors and a lot more bad investors.
Slide 7 – …But Some Will Be – The Power Law
There is no reason to expect Micro-VC or accelerators or angels won’t follow the venture capital power law which sees the vast majority of returns made in just a handful of investments.
Slide 8 – In VC, Wins Are Concentrated with a Few
And if returns in VC come from a handful of large deals, accelerators, angels and micro-VCs will follow a similar pattern. We’re already seeing this in accelerators with a handful of elite accelerator programs a la Y Combinator, AngelPad, TechStars and 500 Startups.
The same will hold for micro-VCs and angels. In venture, we see a handful of funds dominate the largest exits with Sequoia Capital leading the pack.
Slide 9 – Getting In Early to Big Winners is Rare
The previous figures on VC actually overstate the number of VCs who are really good at getting into big winners early. There have only been 36 VCs who invested in two or more billion dollar exits since 2004. And of these, a much smaller percentage got in to the big winners at the Series A or earlier. “Stock picking” for lack of a better term is difficult in venture and this is even for the firms with the most storied histories, most resources and largest teams.
Again, you can expect that micro VCs, angels and accelerators will follow a similar trend. A very small minority will fish in better pond and see better dealflow and also have investment professionals who can see around corners.
Slide 10 – Who Cares?
But who really cares about these emerging smaller investors. Several folks in our experience:
If you are an LP investing in venture funds, there are only so many Sequoia Capital’s or Union Square Ventures that you can invest in. That is, if you’re lucky enough to even have access to those funds. And so many LPs are working with us to figure out which emerging fund managers or even angels might be worth supporting and investing with.
They want to identify the next Greylock, Sequoia, Accel and they’re looking for these emerging fund managers as a way to do this.
Investors (VCs, Corporates, Hedge Funds)
Other mid- and late-stage investors want to identify the best micro-VCs as building relationships with them means access to dealflow (akin to the scout programs of some of the larger funds) and industry information.
Corporations (M&A, Innovation & Strategy)
Corporations want to identify the most promising emerging fund managers for a few reasons.
- Their M&A groups want to identify fund managers early on who are investing in areas of relevance to them as the investments of these managers represent future dealflow
- Their strategy and innovation groups want to track the best investors and the deals they’re doing as they use these early-stage companies as indicators of where the world is going. They want to identify emerging business models, competitive threats and disruptive trends early and the companies of the best early-stage investors provide them a view into this.
This is not necessarily our target market but startups want to know who the best funds are so they can target the best investors during their funding search.
Slide 11 – Here’s the Problem
Despite the knowledge that most micro-VCs, angels and accelerators won’t generate returns and the fact that a lot of different groups ranging from LPs to VCs to Corporations would find intelligence on these funds valuable, they are very tough to assess with any rigor for a few reasons:
- Excessive reliance on the narrative – Like many things in VC overall, anecdote and narrative and gut instinct are key drivers of decision-making. So instead of using data to assess these early stage investors, we rely on cherry-picked anecdotes and smart-sound narratives by investors.
- Opaque – There is not a lot of data on the investments by these firms and what, if any, track record they have. (except of course, on CB Insights)
- Immature – As an investment class, micro VCs, for example, are still relatively new. And so returns data given their relative immaturity is not just tough to come by – it doesn’t exist yet.
Slide 12 – Solve With Data
Given some of these limitations, we can apply algorithms to available data to understand investor quality and effectiveness. This is something we’ve built at CB Insights called Investor Mosaic which leverages a lot of academic research into what drives investment returns in venture.
Slide 13 – Predictive Intel on Investor Quality Using Algorithms
Investor Mosaic uses a variety of factors that correlate with VC performance to determine how micro VCs, angels and accelerators stack up against one another. Those 6 dimensions are detailed below. (Note: More detail on the underlying algorithm and each measure can be found on the Investor Mosaic landing page but I didn’t go into detail on these during the presentation given time constraints)
Slide 14 – Google PageRank for Investors – Network Centrality
One of the drivers of fund performance is a concept called Network Centrality which is a measure of the breadth and quality of connections an investor has with other investors. In essence, venture capital is very much a business about your network. And while all VCs will proclaim to have stronger networks which offer them market intelligence and access to dealflow other lesser investors don’t have, we need to be able to quantify that and that is what our network centrality model does. Our model to calculate network centrality is not very dissimilar to the initial Google Pagerank algorithm which judged a website as more credible if it was linked to by Harvard.edu as an example as well as looking at the number of inbound links a website has.
Similarly, we measure both breadth and quality of relationships an investor has. If your investments frequently get follow-on investment from Sequoia or Greylock or Union Square Ventures, that is a great dear more meaningful than getting them from no-name Joe’s VC shop.
The network map you see on this page is taken from our Business Social Graph and shows the network of Felicis Ventures and their connections to top-tier funds such as Sequoia, Founders Fund, SV Angel and First Round Capital. By virtue of its association with top tier funds, Felicis’ network centrality score is buoyed.
A micro-VC, angel or accelerator’s ability to build relationships with top tier funds either as a co-investor or as a follow-on investor in a round is a key determinant of VC quality.
Slide 15 – Another Way to Look at Syndicate Strength
In addition to the graph-based view of looking at a firm’s investor network, we can also look at its Syndicate Dashboard as we’re doing here for another micro VC, Floodgate. Similar to what we observed with Felicis, we see Floodgate invests alongside several top tier funds including SV Angel, Baseline Ventures and First Round Capital. Perhaps equally or more important is who invests in Floodgate companies after the firm invests. Here is where we see top-tier funds such as First Round Capital, Insight Venture Partners, Andreessen Horowitz and Kleiner Perkins investing in companies after Floodgate has invested.
If you are evaluating a micro VC or any early stage investor, looking at who invests in their companies after and with them is key. Claims of having a great network are all too common and most of the time don’t hold up to data scrutiny.
The next few slides highlight some of the best investors on these individual dimensions. I won’t spend a ton of time on each slide as you can review the names quickly.
Slide 16 – Top Angels Based on Network Centrality
Without going into too much detail, we see some of the top angel investors based on network centrality listed here. The list is headed by Alexis Ohanian who is a YC alum and remains affiliated with the accelerator. A few of the most networked angels are all affiliated with Y Combinator including Garry Tan and Paul Buchheit.
In addition to the angels, you see their most frequent co-investment partners.
Slide 17 – Top Micro VCs Based on Network Centrality
Here we see the top micro VCs based on quality and strength of network and perhaps not surprisingly, SV Angel, who has been at the micro VC game for the longest time leads the pack. Lerer Ventures (now Lerer Hippeau Ventures) of NY gets the #2 spot and 500 Startups round out the top 3.
Slide 18 – Corporate VCs Based on Network Centrality
There is a ton of corporate venture money flowing into private companies now so we also took a look at corporates on the network strength front and saw Google Ventures, Qualcomm Ventures and Intel Capital lead the pack. The same algorithmic approach to evaluating early stage VCs can be used for corporate venture investors. Again, as more money flows in to the ecosystem, it becomes even more important to understand the connectedness of an investor.
Slide 19 – Best Follow-On Rates for Angels & Micro VCs
As we talked about, the ability of angels and micro VCs to shepherd their portfolio companies to subsequent funding is a critical determinant of their success. On this measure, the top angels included Bobby Yazdani, Larry Augustin and Matt Coffin and the top micro VCs were ff Venture Capital, Baseline Ventures and Floodgate.
Slide 20 – The Best Angel Investors Overall (Investor Mosaic)
Naval Ravikant leads the pack among all angel investors followed by Joshua Schacter and Paul Buchheit among all angel investors. These were the top 20 out of all 2000 angel investors we evaluated so anyone on this list is among the elite of the angel investor community.
Slide 21 – Questions
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