This is the seventh in our series of ten frequently asked questions from investors in venture capital partnerships.
Question; How should institutional investors contact VC funds? Directly or via an investment consultant? Do the traditional investment consultants have the background to conduct due diligence on the VC fund(s)?
Answer: First, nothing beats direct contact with managers. I think the VC industry conferences in specific industry sectors provide a great forum for institutional investors to meet directly with VC funds. Historically the two largest conferences have been sponsored by IBF and DowJones. There are also sector specialty conferences, such as the IT Security Entrepreneurs Forum held annually on the Stanford campus, the bring out domain experts.I think that it also makes sense for institutional investors who don’t have the resources to do a full search to work with consultants—however, I will say that, in my experience, many consultants become gatherers of statistics and information—meaning paper pushers—and few of them actually bother to have a deep and current understanding of what is really going on in the market. I’ve actually been shocked at how clueless some consultants are about what is really going in the VC industry. I think the evidence supporting this point is in the fact that, because of the long term nature of the VC business, consultants will choose to back a certain fund and then assume that they can sit back and wait for five or ten years to see if they made the right choice. This is a big mistake, and one of the root causes is because there is a low probability that the same analyst or partner in the firm that made the original “commit” decision is still going to be at the consultant even four years after the original decision to recommend the fund was made. So I am suggesting that a lot of the “standard” recommendations by the consultants in VC are stale. So you need to do research on the consultant’s process as well as directly meet with the venture firms. Any venture firm that won’t meet with you probably doesn’t need your money and won’t give you the kind of respect in a relationship that you should expect, so that’s a great first cut in your process.
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