7 Questions LPs Should Ask VCs (But Don’t)

11/22/11

It’s that time of year: annual investor meetings for limited partners (LPs). LPs are the people who fund venture firms and the general partners (GPs) are the people who lead them. At these meetings, LPs pour over general partners’ (GPs’) reports, calculate TVPI (total value: paid in)/ IRR (internal rate of return), digest confidential past results, test the waters on new funds, jockey themselves into better funds, and mentor their investor base as to what is new and emerging.

I am getting invited as a VC into these pretty special LP meetings for my work in doing entrepreneur lead generation. Perhaps some LPs see my work with pre-entrepreneurs as innovative. There have been zero other VCs in attendance at the LP meetings I have gone to. Basically, I am special because LPs liked my ideas, liked my silly fund name and liked my investment theory based on a conference they met me at: Venture Alpha. My invites all came from doing well at that one conference where I crashed one CS major in (Cory Levy, CEO of ONE) and hugged one CS major who was the Venture Alpha keynote (Aaron Levie, CEO of Box.net). In the same way you do credit card application lead generation for a 19-year-old junior who eventually takes out a loan to buy a car at age 26, you also lead-gen 26-year-old CS major CEOs by finding them when they are 19. That’s the pattern that LPs recognize that I am attempting to replicate.

But I am only in my third week of being a VC, so it is still very weird to be a fly on the wall at LP investor meetings. The meetings are extremely exclusive. And comprehensive. LPs drill down into the details of their specific VC funds—it’s all information the public almost never sees. While I listened, it hit me that the VC model is not broken. Silicon Valley is cyclical. LPs know VCs need to find a whopper of an IPO within every fund to meet TVPI goals and IRR goals (internal rate of return). But getting there is a numbers game. How many entrepreneurs, founders, CS majors, developers, pre-entrepreneurs are in your VC firm’s lead-gen funnel? Saying “deal flow is everything” does not put a concrete, executable plan into motion. I argue it paralyzes.

That led me to think up a few questions that LPs at these meetings should be asking their GPs—but don’t seem to.

1. What does playing Moneyball mean to your firm?

There is one right answer.

Your firm had better be building a massive farm system of IPO potential. We all might have zero clue about which firms will eventually go public, but the key is to have a specific, distinct, transparent, tactical, granular, measurable farm program in place. That takes massive work. Executing Moneyball is about generating a large pool of talent, and making that large pool of talent more talented.

VCs have gone on record at public events talking about Moneyball. They have cited the OBP stat. The “on-base-percentage” statistic does not have an equivalent in VC investing. (It is also inherently obvious that none of those VCs who poo-pooed the Moneyball concept ever read the book or saw the movie.)

VCs who actually have read the book include Roelof Botha. He even recommended the book in public at MJAA conference in 2006 , around the time he invested in YouTube. In short, the data analysis part of the Moneyball concept is not the nugget of knowledge…It is the work that scouts now must do to develop massive and specific entrepreneur farm systems.

From the movie: “Every at bat is like a hand of blackjack played in a casino where your odds massively change based on each pitch dealt.” That has applications for farm team member mentorship and development. I want my fund to have entrepreneurs batting during 3-ball, no strike counts. Getting to a 3-0 count is more likely when you execute 2 to 7 guacamole recipes for entrepreneurship.

2. What matters more in how you recruit and develop venture staff: entrepreneurial experience or operations experience?

The answer I’d be looking for is entrepreneurial experience. You don’t have to have a team made entirely of former founders, like Founders Fund or True Ventures. But what experience do your GPs have as entrepreneurs, besides roping your one LP that launched Fund Uno?

3. How are you using board seats to generate leads and wedge your fund into the best deals?

The old way was to match an emerging hot portfolio company with sexy brand name partner at your firm. The partner or principal who sourced the deal might get … Next Page »

Larry Chiang is CEO of Duck9 and teaches Engineering 145 as a Stanford Entrepreneur in Residence. He has a fund called "Larry Chiang Stanford G51 Fund of Stanford Founders." Follow @

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