Is a Venture Firm More Than the Sum of Its Partners?
Not much.
At least that is the conclusion of a thought-provoking academic paper drawing in part from Correlation Ventures’ proprietary database of U.S. venture outcomes.
Venture firms that have outperformed historically are statistically more likely to outperform in the future as well. But is this outperformance primarily the result of the attributes of the firm or the individual partners?
Stated another way, if a partner leaves a worse performing venture firm and joins a better performing firm, or vice versa, will their future performance change as well? For example, if you took an average VC partner and dropped them into Sequoia, would his or her returns significantly improve?
Prior to seeing the data and findings, I would have hypothesized yes, dramatically. The brand, institutional relationships, processes, and culture of the better performing venture firm should provide significant advantages. The more successful firm might increase access to better deals, make superior partnership-level investment decisions, enable the partner to drive more favorable terms, and/or add more value after the investment.
However, this is not what the authors found.
When a partner moves from one venture firm to either a worse or better performing one, the performance of that partners’ investments remain largely the same. In fact, persistence in performance by partners is six times more important at explaining fund returns than firm attributes.
Of course, much of what explains venture returns is due to randomness and other factors, such as the time period and industry sector in which the firm and partner are investing. This is illustrated by the large 86% shaded area in the pie chart. However, on average, firm attributes explained only 2% of the performance.
The authors of this study are two leading academics who specialize in venture capital and private equity: Matthew Rhodes-Kropf, Ph.D., a Visiting Associate Professor at the MIT Sloan School of Management and also a Founder and Managing Partner of Tectonic Ventures, and Michael Ewens, Ph.D., an Associate Professor of Finance and Entrepreneurship at Cal Tech. Both Matt and Michael have been valued advisors to Correlation since the founding of our firm.
Although an academic paper, I do believe there are some practical takeaways from these findings:
1. VCs should focus on attracting and retaining top talent, and succession plans.
2. LPs should be comfortable evaluating funds based on the attributes of the specific go-forward partners.
3. Entrepreneurs should choose investors based on the attributes of the partner much more than of the firm itself.
Conversely, I would caution against over-interpreting these results. The findings were, by necessity, limited to the performance of just the subset of partners who had moved between different funds. In addition, partner attribution to specific investments was based entirely on board roles, and the authors measured performance indirectly through correlates such as the percent of investments that go public or out of business.
Finally, it remains possible, if not likely, that some firms — such as Sequoia from the example above — may, in fact, be outliers to this general result and do more materially and institutionally increase partner performance.
In the meantime, however, if you happen to be a top-performing VC partner, you may want to consider bringing along these findings, and ask for a raise.
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If you are entrepreneur raising or working with a team that is closing a round, we would value any introductions where we might be helpful as a co-investor.
Correlation Ventures is the predictive analytics pioneer in the venture capital industry and the industry’s leading co-investor. With more than $350 million under management, we’re one of the most active U.S. venture investors, investing in about two to three new investments a month. Over the last five years, we’ve invested in over 185 companies. Correlation offers a dramatically better option for lead investors, syndicates, and companies seeking additional venture capital to fill out a round. We offer the most rapid, convenient, and reliable source of co‐investment capital in the industry; for example, committing to make investment decisions within two weeks or less. Correlation is backed by leading institutional investors.
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