Evaluating a venture fund is mostly evaluating a team and whether their past results came from something repeatable.
14 min read · Level 4
The most useful single question I know for a venture manager is who made the best investment, and whether that person is in the room. It cuts through branding, portfolio lists and marks in one step, and it is surprisingly often answered badly. Venture firms are collections of individual judgements, and a fund's brand can outlive the judgement that built it by a decade.
A venture fund has no revenue, no earnings and, on day one, often no portfolio. What you are evaluating is a team and a plan. Six questions carry most of the weight:
1 Finished track record net DPI of funds old enough to judge 2 Attribution which partner made the winning investments, and are they staying 3 Concentration of results what the record looks like without the best exit 4 Strategy and fund size does the size fit the stage and cheque size 5 Reserves how much is held back for follow-on rounds 6 Terms and alignment fees, carry, hurdle, and how much the GP has committed
Fund size matters more than it looks. A seed fund that grows from 50,000,000 to 300,000,000 must either write much bigger cheques, invest in far more companies, or move to later stages. Each changes the strategy that produced the original record.
Alignment is concrete: the GP's own commitment to the fund, how carry is shared among partners, and whether fees alone make the firm profitable regardless of results. When management fees on a large fund comfortably cover the team's pay, the incentive to take care over each investment weakens.
Because past venture returns are unusually hard to repeat and unusually easy to misattribute. A strong fund may reflect one partner who has since left, one exceptional company, or a vintage when everything went up.
It is also where most individual LPs are weakest. They see a brand, a well-known portfolio company or a strong TVPI, and skip the questions that decide whether the result can happen again.
And you cannot fix a bad choice. Once committed, you are in for a decade with no practical way to leave.
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Sources: U.S. SEC - Investor.gov, protecting your investments; FINRA - investor information; CFA Institute
A manager raising Fund III. Their materials highlight a 3.5x TVPI on Fund II.
What the investor asked for, and found:
Question Finding Fund I (8 years old) net DPI 1.1x Fund II (5 years old) DPI 0.2x, TVPI 3.5x Fund II without top company TVPI falls to 1.3x Partner behind top company left the firm last year Fund size Fund II 60,000,000, Fund III target 250,000,000 GP commitment 1% of fund
Reading it. The only finished fund returned 1.1x net - roughly capital back after a decade. Fund II's headline depends mostly on one unrealised company, sourced by someone no longer there. Fund III is four times larger, so the strategy will change. None of this proves Fund III will do badly, but almost nothing in the record is evidence it will do well.
Decision. The investor passed, and wrote down the three facts that decided it.
Committing because of a famous portfolio company. A well-known name tells you the fund owned it, not how much, at what price, who found it, or whether the rest of the portfolio made money.
Ask for DPI, TVPI and net IRR for each fund, with fund age. Give most weight to funds at least seven or eight years old.
Remove the best exit and see what remains. If the record collapses, you are looking at one outcome, not a repeatable process.
Ask which partner led each of the top investments and confirm they are committed to the new fund, including through key-person provisions in the agreement.
Divide fund size by expected number of companies and cheque size. If the new fund cannot follow the old strategy, treat the old record as weaker evidence.
Ask what share is reserved for follow-ons and whether fee income alone would sustain the firm. Strong alignment means the team gets rich only if LPs do.
Before committing to any venture fund, feeder or platform that selects a fund on your behalf.
Do not rely on this checklist to pick a fund if you cannot get the underlying data. If a manager will not share net results by fund, that is itself the answer.
Managers with a strong early fund commonly raise much larger successor funds. To deploy the capital they write larger cheques in later rounds, where prices are higher and competition stronger. Industry studies of fund performance have found that returns tend to weaken as fund size grows beyond what a strategy can absorb, although the relationship varies by manager and period.
Ask how the new fund will deploy its capital, and whether that is the same activity that produced the old record.
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