Do venture investors with the biggest and best networks end up producing the best returns? An academic paper from a few years ago by Yael Hochberg, Alexander Ljungqvist, and Yang Lu titled “Whom You Know Matters: Venture Capital Networks and Investment Performance” (embedded at the bottom of this post) suggests that is the case. They looked at historic venture returns and found that “better-networked VC firms experience significantly better fund performance,” as measured by how many of the companies in their portfolios exited via an IPO or acquisition.
A venture firm’s network in the study was defined as being made up of all the other venture firms who co-invested with it in funding rounds. The more co-investors a venture firm has, the better its network. The better its network, the better its overall returns. The correlation between the size of a venture firm’s network and its returns may have something to do with better access to deal flow, talent, advisers, potential customers, and potential exits.
If this is true, then who are the most connected venture firms and angel investors today? Vijay Dondeti, a graduate student in bioinformatics, applied the analysis in the Hochberg paper to about 2,700 investors in CrunchBase who participated in over 3,300 startup funding rounds between 2006 and 2008. He scored each investor based on how well connected they are to other investors as well as how well-connected their co-investors are to other investors. “In summary,” says Dondeti, “to get a high score, you need to co-invest often with others that also co-invest often.”
So which venture investors have the best networks? Here are the top 10:
1. Draper Fisher Jurvetson
2. Sequoia Capital
3. Accel Partners
4. Intel Capital
5. First Round Capital
6. Dag Ventures
7. New Enterprise Associates
8. Kleiner Perkins Caufield & Byers
9. Benchmark Capital
10. Ron Conway
Draper Fisher Jurvetson takes the top spot. Will its returns beat everyone else’s, or is it just that its spray-and-pray investing strategy gives it an advantage in this type of ranking system? Top-tier firms such as Sequoia, Accel, Kleiner Perkins, and Benchmark also score highly, as does First Round Capital and angel investor Ron Conway. Other individual investors a little further down the list include Reid Hoffman (No. 18) and Marc Andreessen (no. 31).
Below is a ranking of the Top 100, or you can review the entire data set for all 2,700 investors here.
This is not surprising, the VC game more than many other industries is an insiders game. What bothers me is that there is no one descent VC that is New York based and all the money is in the Valley.
I disagree with you Gebadia. As an ex stockbroker for over 12 years and looking at deals being put together, it is who you know, not what you created. If you go to the majority of these VC firms and tell them you have created a traversable wormhole for time travel, they could care less. They care more about what is you golf game like and who you know. There are so many great ideas. It really is about timing and being at the right place at the right time. Another example Larry and Sergey had to Solicit funds from faculty members, family and friends. VC were not knocking on their garage door at the beginning.
If these companies had talent scout rankings i would give them all an “F.” They obviously are betters and not talent scouts. Explains why VC’s have a miserable overall company success rate. Funny how that picture resembles the MyLocator theory.
I’m surprised Draper Fisher Jurvetson placed first. I’ve only heard negative things about DFJ. For example, they are well know for screwing their entrepreneurs in terms of the deal terms. The Hotmail got ripped off by DFJ due to shady clauses. Best to avoid.
Founder of hotmail almost walked out of the deal (without other options) in order to drive hotmail’s valuation up. Got “cheap” money. If he got screwed on the clauses, well, he played hardball.
Draper Fisher Jurvetson is a one hit wonder with Hotmail. I have a friend who did a presentation for them and he came away very unimpressed with their overall technical knowledge. Too many MBA who don’t have any real world experience but only looked at a screen with number to an excel file. These guys are and continue to be a one hit wonder with Hotmail.
very funny. We don’t use Excel for investment decisions. I guess I should be happy that you see Hotmail as a bigger hit than Skype, Baidu, ENOC, ATHN, oh heck, I’m not sure it even ranks in our top 10
The top 10 list in this report is very similar to the top 10 most active vc firms. Just because a firm is very active, doesn’t meet their returns, measured by multiples, is going to be better than others, so a major flaw in this report. I do agree the a strong network is critical to success, but rather than looking at this from a firm level, I would prefer to see this from a partner level. Which VC partners are the most well connected?
That’s a very interesting study, but I do wonder if it is somehow looking backward to a time when exits were at high values to the public market. These days the sweet spot for exits is M&A at a $20 to $50 million valuation. Getting the right amount of capital to do that would seem to run counter to the big syndicates of past years. This would seem to me to support the need for entrepreneurs to build their network of support not through VCs, but more generally through the use of advisers. In other words, money should be obtained for the purposes of finance. And, advisers should be selected on the basis of network.
I do think that when money is required, it is important to get the right amount, and to get it if possible from a fund that has a strong network. But, the way to determine if a VC is properly networked is more about how the VC is networked with potential strategic partners, service providers and other key people in the ecosystem. And, experience structuring and executing deals is essential. I am expecting that when the evaluation is done in 2013, what we will see is that what makes a successful VC will be closely aligned with what allows an entrepreneur to successfully grow a $10 million revenue business and a $40 million sale.
Ok, makes no sense. The first thing any VC will ask is/ WHO DO YOU KNOW? Some VC’s wont even look at your plan unless they know who you are. I used to think that your good biz model is all you need. But unless you have made $1MM, your connections are all you have.
Maybe the idiot kids of America are finally beginning to realize that it’s probably a better idea to borrow $15,000 from friends and family and not sign a deal with Ycombinator to do business.
JMHO, but kids see that Ycombinator’s deals beneift Ycombinator, but not them. And now this story affirms the fact that Ycombinator’s business model is less than stellar.
Chickenhawk VC tactics worked because kids don’t know better. But Adults do, and stranger/danger talks are keeping them away from the Ycombinator paneled van of deception and defeat.
AG: The DFJ portfolio is available on our site and searchable. Recent exits include the EnerNOC and athenahealth IPOs in the U.S., and internationally, we were the largest shareholders in Baidu and Skype.
Jon: as the person who negotiated those terms, I politely disagree. Every round was an up round with vanilla economic terms, and particularly generous terms on founder vesting. We were the only investors in the Series A, Series B, and interesting, the last round of financing.
As to why we would consistently be ranked as one of the most active and connected venture group, I would simply point to the DFJ Global Network. For over a decade, we have been building a network of networks in the VC business, which has grown to over 140 investment professionals in 30 global locations. http://www.dfj.com/network
No reply is even necessary. Some people always find something bad to say about everything. If it wasn’t for VCs and individual investors, most of the companies that are now making up what we know as internet, would not exist. Putting all the rest of the statistics aside, being active during economic downturn is actually much better indication of successful company.
While we’re working on business plan and starting to look for funding, it’s great to know that there are companies out there looking to invest.
The analysis omits the fact that the VC asset class has generally awful performance relative to nearly every other asset class over most measurement periods. Performance is massively concentrated in the top 5 or 10% of funds, and the asset class is generally horrible.
There is only one metric that matters for VC’s and that is IRR. How “networked” a fund is seems silly as a metric, and seeks a correlation that likely does not exist. If you added in biotech focused funds, you would see large “networks” because of the massive capital requirements and large syndicates but even more awful performance statistics.
On the other hand, private equity funds, as opposed to VC funds, typically have far fewer or no co-investors. Even when large “club” PE deals were happening, it was a pretty small number of funds relative to what a Series F VC backed company ends up with. And PE funds typically have well out performed VC funds over nearly any period you can measure.
IRR is the best measure to rank performance. However, it is not publicly disclosed. So, the goal is to find something that is more readily available and see how it relates to IRR. Hochberg et al. were able to obtain IRRs using Right To Information requests and found that the strength of the network is correlated to the returns. The other thing to keep in mind is that the IRR is calculated over a 10-15 year cycle. Even if IRRs were readily available, they may not the best way to get a measure of the “current” performance of a VC investor. I am not saying that the extent of the network is the best measure, but it can reflect the current state of things better than the IRRs.
Why is Lisa Loeb on the wheel? (About 10 to the right from the top of it). I loved her #1 hit “stay” along with everyone else, but she’s not anywhere in crunchbase: http://www.goog...mp;oq=&aqi=
Am I missing something here? Did you say that it was a graphic from YOUR early facebook network?
Does this mean that you also wrote the blog post ? (It says at the top that Erick wrote it.) Or did Erick ask you for a photo to accompany the piece he wrote?
It has the apperance of Techcrunch acting as “PR” agency for DFJ ? (Excuse me if I have got the wrong end of the stick) That would be a real network effect!
Interesting study, but with one fallacy. Does it mean that a smart VC who goes solo (no network) will perform worse over time?
This study would have you believe that it’s the case. However, the smart solo VC is stuck in the same category with the too-dumb-to-have-a-network VC, which kills the results.
I still believe smart VCs can do very well without a network, but this study is inconclusive.
Small point, but a smart solo venture capitalist isn’t going to be lacking a network. A network isn’t something that only a company can develop. A person has his own professional network.
Perhaps it’s just that better investment opportunities tend to attract more investing firms, and thus the higher return investments tend to be more likely where co-investment occurs.
more attractive investment = more likely to attract co-investment
*not*
better network = more likely co-investment = higher returns
Why does the VC’s network have to be the driver of co-investment situations?
While how connected a Venture Investor is definitely is important for success, these researchers missed the mark on how to define “connected”.
It is much more important for VC’s to be connected with executives in established companies\industries who can provide:
1) advice to portfolio companies
2) a channel for distributing a startup’s product
3) managerial talent
4) a possible acquisition
Another tweak on the study is how important “connections” are in a specific vertical. I would throw out that the more niche your market the more important that your investor has deep ties.
Would be interesting to see how being “networked” relates to their returns. Would also be interesting to see how individual operators within the the VCs rate.
Frankly I never knew so much about venture capitalists until this post. So much of knowledge in this article. The discussion is equally valuable. Good one Erick, keep up the good writings
Jurvetson, I concur fully with you that DFJ is a premier VC firm in the Valley and in the world. I have full respect for the passion with which you guys have built the firm. Do not mind the trolls overhere on TC. They moan and bitch about everything. If you´re successful, some people will always detest you for whatever reason they want.
It is ironic to read that people are mentioning Hotmail as one of DFJ´s biggest exit. I reckon MSN only paid about $500 million for Hotmail – have you guys not heard of all the blockbuster exits that DFJ has realized so far. They make the Hotmail exit pale in comparison.
I combined and re-ranked this list with TechCrunch’s Top 100 Networked VC’s. Interesting results,- Social Media is a big factor, see here: The Top 21 Socially and Deal Networked VC’s http://bit.ly/18XqFI
I meant – I re-ranked this list with Larry Cheng’s Top 100 according to GoogleReader subscribtions- the results yield a slightly different, perhaps more balanced view: http://bit.ly/18XqFI
@Amusis–the authors of the paper present a strong argument to refute reverse causality.
“We do not believe that our results are driven simply by reverse causality, that is, a higher fund exit rate enables a VC to improve its network position, rather than the other way around. Recall that we construct the network centrality measures from syndication data for the 5 years _before_ a fund is created. The fact that these data can help explain fund performance over the next 10 years suggests that networking truly affects performance.”
“Moreover, we find little evidence that past exits drive future network position. Instead, what appears to be key in improving a VC firm’s network position is demonstrating skill in selecting, and adding value to, investments.”
so where can i get a high-res copy of that “friendship wheel” vs. the largely useless thumbnail?
here: http://www.flic...378275/sizes/o/
thanks!
Looks like you don’t have a hotline to God after all, fella…
Tan: You’re onto great things with these guys.
And when I say “great”, I mean slow growth followed by liquidation.
Your girlfriend aint so pretty naked, huh?
Detailed listing of their investments would be nice too.
It’s all on Crunchbase.
@ Robert, you’ll have the detailed investments by VC here in the excel file link: http://wallen.t...crunchbase.html
Actually, the top 10 in Vijay’s ranking is quite similar to the top 10 in terms of number of deals in the above link.
use this app to analyze the investment profile of each VC: http://www.youc...s/1232025465700
This is not surprising, the VC game more than many other industries is an insiders game. What bothers me is that there is no one descent VC that is New York based and all the money is in the Valley.
Not true- there are several good VC’s in NYC. UnionSquareVentures.com and DFJGotham.com for starters.
People say that when nobody will listen to his idea…
I disagree with you Gebadia. As an ex stockbroker for over 12 years and looking at deals being put together, it is who you know, not what you created. If you go to the majority of these VC firms and tell them you have created a traversable wormhole for time travel, they could care less. They care more about what is you golf game like and who you know. There are so many great ideas. It really is about timing and being at the right place at the right time. Another example Larry and Sergey had to Solicit funds from faculty members, family and friends. VC were not knocking on their garage door at the beginning.
If these companies had talent scout rankings i would give them all an “F.” They obviously are betters and not talent scouts. Explains why VC’s have a miserable overall company success rate. Funny how that picture resembles the MyLocator theory.
I’m surprised Draper Fisher Jurvetson placed first. I’ve only heard negative things about DFJ. For example, they are well know for screwing their entrepreneurs in terms of the deal terms. The Hotmail got ripped off by DFJ due to shady clauses. Best to avoid.
Founder of hotmail almost walked out of the deal (without other options) in order to drive hotmail’s valuation up. Got “cheap” money. If he got screwed on the clauses, well, he played hardball.
Draper Fisher Jurvetson is a one hit wonder with Hotmail. I have a friend who did a presentation for them and he came away very unimpressed with their overall technical knowledge. Too many MBA who don’t have any real world experience but only looked at a screen with number to an excel file. These guys are and continue to be a one hit wonder with Hotmail.
very funny. We don’t use Excel for investment decisions. I guess I should be happy that you see Hotmail as a bigger hit than Skype, Baidu, ENOC, ATHN, oh heck, I’m not sure it even ranks in our top 10
The top 10 list in this report is very similar to the top 10 most active vc firms. Just because a firm is very active, doesn’t meet their returns, measured by multiples, is going to be better than others, so a major flaw in this report. I do agree the a strong network is critical to success, but rather than looking at this from a firm level, I would prefer to see this from a partner level. Which VC partners are the most well connected?
That’s a very interesting study, but I do wonder if it is somehow looking backward to a time when exits were at high values to the public market. These days the sweet spot for exits is M&A at a $20 to $50 million valuation. Getting the right amount of capital to do that would seem to run counter to the big syndicates of past years. This would seem to me to support the need for entrepreneurs to build their network of support not through VCs, but more generally through the use of advisers. In other words, money should be obtained for the purposes of finance. And, advisers should be selected on the basis of network.
I do think that when money is required, it is important to get the right amount, and to get it if possible from a fund that has a strong network. But, the way to determine if a VC is properly networked is more about how the VC is networked with potential strategic partners, service providers and other key people in the ecosystem. And, experience structuring and executing deals is essential. I am expecting that when the evaluation is done in 2013, what we will see is that what makes a successful VC will be closely aligned with what allows an entrepreneur to successfully grow a $10 million revenue business and a $40 million sale.
I only considered investment rounds from 2006-2008 in order to reflect current circumstances as much as possible.
Nice to see our Series B VC up there
hey,
can anyone give me a hint where i find a number on how many online or tech startups were established in 2007 or 2008??
thanks!!
Isn’t the answer on twitter ?
So bigger is better? Imagine that.
What a useless metric. How connected someone is is totally useless.
airtight logic, dude.
Ok, makes no sense. The first thing any VC will ask is/ WHO DO YOU KNOW? Some VC’s wont even look at your plan unless they know who you are. I used to think that your good biz model is all you need. But unless you have made $1MM, your connections are all you have.
A detailed listing of their investments would be welcome. Also, we can have the interviews of these demi-gods on their best and worst investments.
Maybe the idiot kids of America are finally beginning to realize that it’s probably a better idea to borrow $15,000 from friends and family and not sign a deal with Ycombinator to do business.
JMHO, but kids see that Ycombinator’s deals beneift Ycombinator, but not them. And now this story affirms the fact that Ycombinator’s business model is less than stellar.
Chickenhawk VC tactics worked because kids don’t know better. But Adults do, and stranger/danger talks are keeping them away from the Ycombinator paneled van of deception and defeat.
AG: The DFJ portfolio is available on our site and searchable. Recent exits include the EnerNOC and athenahealth IPOs in the U.S., and internationally, we were the largest shareholders in Baidu and Skype.
Jon: as the person who negotiated those terms, I politely disagree. Every round was an up round with vanilla economic terms, and particularly generous terms on founder vesting. We were the only investors in the Series A, Series B, and interesting, the last round of financing.
As to why we would consistently be ranked as one of the most active and connected venture group, I would simply point to the DFJ Global Network. For over a decade, we have been building a network of networks in the VC business, which has grown to over 140 investment professionals in 30 global locations. http://www.dfj.com/network
No reply is even necessary. Some people always find something bad to say about everything. If it wasn’t for VCs and individual investors, most of the companies that are now making up what we know as internet, would not exist. Putting all the rest of the statistics aside, being active during economic downturn is actually much better indication of successful company.
While we’re working on business plan and starting to look for funding, it’s great to know that there are companies out there looking to invest.
May they all go bankrupt.
Is coinvestment the key to measure how connected a VC is or is it just the only one available?
Interesting study, specially for LPs. It would be great to track how this list performs in the future.
The analysis omits the fact that the VC asset class has generally awful performance relative to nearly every other asset class over most measurement periods. Performance is massively concentrated in the top 5 or 10% of funds, and the asset class is generally horrible.
There is only one metric that matters for VC’s and that is IRR. How “networked” a fund is seems silly as a metric, and seeks a correlation that likely does not exist. If you added in biotech focused funds, you would see large “networks” because of the massive capital requirements and large syndicates but even more awful performance statistics.
On the other hand, private equity funds, as opposed to VC funds, typically have far fewer or no co-investors. Even when large “club” PE deals were happening, it was a pretty small number of funds relative to what a Series F VC backed company ends up with. And PE funds typically have well out performed VC funds over nearly any period you can measure.
Fund performance matters, the rest is irrelevant.
IRR is the best measure to rank performance. However, it is not publicly disclosed. So, the goal is to find something that is more readily available and see how it relates to IRR. Hochberg et al. were able to obtain IRRs using Right To Information requests and found that the strength of the network is correlated to the returns. The other thing to keep in mind is that the IRR is calculated over a 10-15 year cycle. Even if IRRs were readily available, they may not the best way to get a measure of the “current” performance of a VC investor. I am not saying that the extent of the network is the best measure, but it can reflect the current state of things better than the IRRs.
Why is Lisa Loeb on the wheel? (About 10 to the right from the top of it). I loved her #1 hit “stay” along with everyone else, but she’s not anywhere in crunchbase: http://www.goog...mp;oq=&aqi=
The big wheel: http://www.flic...378275/sizes/o/ (and: http://www.yout...h?v=Dh3PLL1F9ZU )
The graphic is from my early facebook network, so is not related to the crunchbase analysis in the article.
I knew her from high school in Dallas, and yes, she rocks.
You can see some of the network clustering if you mouse over the graph here:
http://www.flic...son/2234378275/
Am I missing something here? Did you say that it was a graphic from YOUR early facebook network?
Does this mean that you also wrote the blog post ? (It says at the top that Erick wrote it.) Or did Erick ask you for a photo to accompany the piece he wrote?
It has the apperance of Techcrunch acting as “PR” agency for DFJ ? (Excuse me if I have got the wrong end of the stick) That would be a real network effect!
Interesting study, but with one fallacy. Does it mean that a smart VC who goes solo (no network) will perform worse over time?
This study would have you believe that it’s the case. However, the smart solo VC is stuck in the same category with the too-dumb-to-have-a-network VC, which kills the results.
I still believe smart VCs can do very well without a network, but this study is inconclusive.
Small point, but a smart solo venture capitalist isn’t going to be lacking a network. A network isn’t something that only a company can develop. A person has his own professional network.
Perhaps it’s just that better investment opportunities tend to attract more investing firms, and thus the higher return investments tend to be more likely where co-investment occurs.
more attractive investment = more likely to attract co-investment
*not*
better network = more likely co-investment = higher returns
Why does the VC’s network have to be the driver of co-investment situations?
What a useless metric. How connected someone is is totally useless.
____________________________
http://www.acrobatusers.com
Amazing to see Ron competing with entire clusters of others. This has got to be a pareto distributed network structure.
This conclusion could have been guessed. But it is good to see the reinforcement based on sound data.
While how connected a Venture Investor is definitely is important for success, these researchers missed the mark on how to define “connected”.
It is much more important for VC’s to be connected with executives in established companies\industries who can provide:
1) advice to portfolio companies
2) a channel for distributing a startup’s product
3) managerial talent
4) a possible acquisition
Another tweak on the study is how important “connections” are in a specific vertical. I would throw out that the more niche your market the more important that your investor has deep ties.
A
Maybe people _want_ to be connected to successful VC’s and not the other way around.
Would be interesting to see how being “networked” relates to their returns. Would also be interesting to see how individual operators within the the VCs rate.
Show us the numbers too — how much the invest. I am sure I can find them, but help me not surf..
pls look…0
Correlation is not causality.
The high initial returns could have resulted in a better reputation which attracted more partners.
Also,both could have been caused by a third factor.
surprised Maveron didn’t make the list:
Capella completed IPO (NASDAQ: CPLA)
Cranium acquired by Hasbro (NYSE: HAS)
drugstore.com completed IPO (NASDAQ: DSCM)
eBay completed IPO (NASDAQ: EBAY)
Good Technology acquired by Motorola, Inc. (NYSE: MOT)
JobFlash acquired by Taleo (NASDAQ: TLEO)
lucy activewear acquired by VF Corporation (NYSE: VFC)
PeoplePC (NASDAQ: PEOP) acquired by EarthLink company (NASDAQ: ELNK)
Qsent acquired by TransUnion
Reactivity acquired by Cisco Systems (NASDAQ: CSCO)
Shutterfly completed IPO (NASDAQ: SFLY)
Great post Erick
Frankly I never knew so much about venture capitalists until this post. So much of knowledge in this article. The discussion is equally valuable. Good one Erick, keep up the good writings
Sonal
USourceIT: Riskfree IT outsourcing/ sourcing partner for small and medium buisnesses.
Curious to know how the wheel was created? Which software / library?
It is a Facebook app called “Friend Wheel”
http://www.face...p?id=2415325843
So who *are* the most successful VCs so far, at the moment?
The ones who have produced the most returns in say, the last 7 years.
Jurvetson, I concur fully with you that DFJ is a premier VC firm in the Valley and in the world. I have full respect for the passion with which you guys have built the firm. Do not mind the trolls overhere on TC. They moan and bitch about everything. If you´re successful, some people will always detest you for whatever reason they want.
It is ironic to read that people are mentioning Hotmail as one of DFJ´s biggest exit. I reckon MSN only paid about $500 million for Hotmail – have you guys not heard of all the blockbuster exits that DFJ has realized so far. They make the Hotmail exit pale in comparison.
I combined and re-ranked this list with TechCrunch’s Top 100 Networked VC’s. Interesting results,- Social Media is a big factor, see here: The Top 21 Socially and Deal Networked VC’s http://bit.ly/18XqFI
I meant – I re-ranked this list with Larry Cheng’s Top 100 according to GoogleReader subscribtions- the results yield a slightly different, perhaps more balanced view: http://bit.ly/18XqFI
Perfect work!
Gluttony kills more men than the sword.
Good health is above wealth
@Amusis–the authors of the paper present a strong argument to refute reverse causality.
“We do not believe that our results are driven simply by reverse causality, that is, a higher fund exit rate enables a VC to improve its network position, rather than the other way around. Recall that we construct the network centrality measures from syndication data for the 5 years _before_ a fund is created. The fact that these data can help explain fund performance over the next 10 years suggests that networking truly affects performance.”
“Moreover, we find little evidence that past exits drive future network position. Instead, what appears to be key in improving a VC firm’s network position is demonstrating skill in selecting, and adding value to, investments.”