If you’re an entrepreneur looking for an investment, or an investor looking to make some money, what should you look for in a VCs? Here are five rank-ordered areas to assess:
1. Relationships. Who does the VC know, invest, work, travel and win with? Look for relationship pedigrees that include major law firms, successful entrepreneurial testimonials and happy institutional investors.
2. Performance. While VCs win whether they succeed or fail, you need to know what the empirical record actually shows, not lore or hearsay, but actual results, like the internal rate of return of each and every fund they’ve raised and the carried interest that investors actually received. Take no prisoners here: this is the most important due diligence you will ever do.
3. Advocacy. Assess the firm’s orientation — is it an entrepreneur-friendly firm or a firm that’s focused primarily on its investors? There are strengths and weaknesses with each bias, but remember that entrepreneur-friendly firms have better deal flow than firms that have investor biases.
4. Knowledge. While many VCs are not rocket scientists, they should also know enough about themselves to know what they don’t know. There is no more deadly combination than arrogance and stupidity — if you see this combination, run for the hills.
5. Professional integrity. It’s important to calibrate the integrity and ethics that define your VC firm. If you’re wondering why “professional integrity” is last on my rank-ordered list, it’s not that professional integrity isn’t important, it’s just that the other four areas are more important. This will tell you everything you really need to know about VCs.