This is the fourth in our series of ten frequently asked questions from investors in venture capital partnerships.

Susan Mangiero, CEO of Investment Governance’s Fiduciary X, asked me the following:

Question: Are there ways to mitigate the team risk when in fact VC funds often back a particular team or particular CEO?

Answer: When we back serial entrepreneurs, it is critical to assess where they are today in their lifetime achievement and performance potential curve.  By that, I am reminded of the fundamental risk in looking at track records—“past performance is not indicative of future returns.”  It amazes me how many investors chase performance and don’t pay attention to the current team composition at the VC manager, to the current dynamics of the partnership.  Ideally you want to back a proven winner who is still hungry enough to deserve a seat at the table.  Venture capital is totally a hits- driven business, but there are very few hitters, either VCs or entrepreneurs– who are able to hit multiple home runs.  When you look at VC’s, you want to find VC’s who are magnets for great entrepreneurs, whether they are first timers or veterans, and rely on the VCs’ pattern recognition ability to make that judgment call in picking a winner.  One way to mitigate risk is to assess how deep the team is in the VC organization—remember that you are making a 10 year bet on a team, and few teams stay together through an entire cycle.

Related posts:

1. VC Governance FAQ: (3) How can investors protect themselves against key-person risk from fraud in VC-backed portfolio companies?
2. VC Governance FAQ: (5) How are VC funds governed differently from the governance standards applied to their portfolio companies?
3. Web-Based Seminar Will Announce New Venture Board Governance Initiative on February 2 at 9:00 AM PST
4. VC Governance FAQ: (10) Are limited partner defaults on capital commitments triggering a wave of lawsuits in the venture industry?
5. Confusing Risk Capital with Systemic Risk– Venture Capital Catalyzes Unlevered Economic Growth, NOT SYSTEMIC RISK

This entry was posted on Thursday, March 11th, 2010 at 8:00 am and is filed under Adult Education, Corporate Governance, Entrepreneur, Leadership Profiles, VC Board Best Practices, Venture Board Governance White Papers, Venture Capital, Web/Tech, Working Group on Director Accountability. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.