The best VCs in the world aren’t those capable of finding great companies. The best VCs in the world are those that can exit (generational) companies.
There is so much focus on finding great companies that we’ve all forgotten that finding a great founder and company is a small part of the job. The rest of it is to help the founder create value and then exit the company. As we’ve seen over the last 3 years, exiting is really really hard. But that’s what distinguishes the best from the rest. In times like this, the best funds out there figure out a way to give money back to their LPs— markets closed or not. Everyone else sits back as if their hands were tied behind their back because the IPO window is closed and the M&A markets are slow.
I’m not going to opine on how they did it but look at Sequoia. IPO window is closed, Stripe is staying private for longer, but Sequoia is returning a nice lump of cash back to their LPs (to those that want it anyway).
Making an investment and wiring cash is easy. Exiting and returning money to LPs is not.
Most VCs write their cheques and sit back and relax. They’re there to support the founder and might even have a value-creation team go in and aid the company. But most aren’t able or willing to drive a company to exit. A company like Stripe will eventually exit via IPO. Because that’s the normal thing for generational companies to do.
But what about everything else? What about companies that aren’t good enough to go public? Funds have finite lives of 10+2 years (it’s longer than that but I digress); as they get older, companies eventually go under. But what about the companies that are good enough to not go under, but aren’t good enough to be acquired? Does the GP sit on those positions forever?
Again, the best GPs will figure out a way to exit those companies and return capital back to their LPs. Everyone else will go back to their LPs year after year and ask for new extensions on the fund because they don’t know how to drive companies to exit.
The other area that distinguishes the best VCs and everyone else is for companies going under. A dud of a GP will write it off to zero and call it a day. A great GP, will push behind the scenes and do things to generate an “exit”. Fine, the “exit” might return less than the cost, but that’s infinitely better than nothing. To me, that’s a pretty clear difference in value-add between the great GP and the dud of a GP.
The former will be able to recycle the money into a potential winner, boosting eventual fund performance and returns, while the latter tries to figure out why their track record isn’t as good.
If a GP can get something back to recycle, it can make a difference, even if the amounts seems small. Getting back $500K on a $2M investment doesn't seem like that much but do it enough time and it will make a difference. (If you’re curious to see the kind of impact it can have, I previously wrote about how the performances of funds look with and without recycling).
The measure of a GP’s ability shouldn't just be for their propensity for identifying great companies but also for their capacity to guide companies to exits too. Yes, TVPI might impress in the short term, but what really counts is DPI—the tangible returns that LPs can actually take to the bank. The best GPs are those who understand that their job is far from over after the investment is made; it’s just beginning— sometimes that gets forgotten. But the best ones know.
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None of the above should be considered fund advice, investment advice, financial advice, or legal advice. It is strictly for informational purposes and is accurate to the extent of the author(s) knowledge. Generalizations may be made to illustrate ideas and should not be taken literally. The views and writings above are strictly those of the author(s) and do not in any way represent the views of past or present employers.