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Protocol Pipeline
The inside story of the venture capital and startup world by Biz Carson.

Does your name on a list make you the best?

Does your name on a list make you the best?

Hello and welcome to Pipeline. This week: how to know you're the best if it's not printed on a list, loving to hate on Tiger Global and five questions with Cowboy Ventures' Jomayra Herrera.

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Overheard

  • Strategic investors: "I had 'strategic' investors at my first startup. I learned first hand what a bad idea this can be, even when they're good people." — Upfront's Mark Suster.
  • Game planning: "Like basketball, venture capital and entrepreneurship are games of angles and tempo. Figure out your unique lane (how you'll distinguish yourself from the competition) and run at the speed that best suits you." —MaC VC's Marlon Nichols.
  • You know nothing: "This may sound obvious but if you're sitting with a portfolio company and find yourself thinking that you're the smartest person in the room then you're either delusional or you've made a terrible investment decision. Neither of these is a good thing." —Uncork's Andy McLoughlin.

The Big Story

If the world doesn't know you're the best VC, are you even the best VC?

What defines success for a venture capitalist and, more importantly, how does the world know who has had that success? Forbes released its Midas List this week, which ranks the top venture capital investors. That means it's time for VCs to tweet about the Midas List, to humblebrag, to congratulate other VCs or just complain.

  • I ran the list for two years, so I have thoughts on how it works and its efficacy.
  • But for the purpose of today's newsletter, I want to focus on the marketing around the Midas List, as well as what defines excellence in venture capital and how the world knows who is excellent.

This can be a fraught time of the year for venture capital marketing partners — a little like Oscar time for movie promoters.

  • Some VC investing partners — their bosses — pester the marketing partners throughout the year to get them on the Midas List.
  • So the marketing partners spend time strategizing and figuring out ways to better promote their VCs and their exits, and have them meet Forbes reporters, editors or TrueBridge (the data provider for the project).

But it's getting harder to get on the list, one marketing partner tells me. The Midas List opened up to China investors a while back, added more seed investors and there are just more VCs scoring big exits these days.

  • Even with one massive exit, such as Coinbase, there are many firms that invested.
  • But if you look at the list, not all firms that led even early-stage bets on Coinbase made the list.

So what's a marketing partner to do? In a year when a VC doesn't have an exit, marketing partners can breathe easier. But if the VC has exits and is on the bubble — like Weber State trying to get into March Madness — then: "In years when they're on the bubble, they're on my ass," another marketing partner said.

  • Marketing partners then try to reason with their VCs, but, "They don't like to hear that it's not influenceable because they hear from other VCs that it is influenceable."

I've written about why marketing and PR is such a focus for VCs, but why do they care so much, besides just being a thing to tweet about? First and foremost are VC egos. Need I say more? "For 15 minutes when the list comes out, texts and emails ricochet across the Valley," another marketing partner said. "It's like high school."

  • But some limited partners actually care about their VCs landing on the list.
  • Of course, these LPs know which investors are making the most money, since they see the data. But they can show the Midas List rankings to other investing partners in their firm — who may know nothing about VC or individual GPs — as well as their firm's own investors, who are another step removed and may be sovereign wealth funds or other wealth managers who may see a selection on the list as evidence of the LP's prowess in selecting top VC managers.
  • So a Midas List ranking may actually help a VC get more LP investors on board.

At the same time, another VC marketing partner countered: "I've never seen the words 'Midas List' on an LP pitch deck."

But what is the actual measure of VC success? And how do you know who is meeting that?

  • Pure return-based: In other words, how much capital a VC firm is sending back to its LPs through its VC funds. Usually this is done on a multiples basis (cash on cash returns) through DPI (all exited companies) or TVPI (including non-exited companies) or on a time-weighted basis, known as net IRR. But some firms drive the highest dollar return — which is typically late-stage firms — while others drive the highest multiples, either on an absolute or time basis, which is typically early-stage investors. In other words, some seed investors get 1,000% returns but return relatively small dollars, while some late-stage investors can return big dollars, but have relatively small multiples. The best investors can do both in one deal. That happens fairly rarely, though; looking just at IPOs, I previously found that relatively few seed or series A deals return both high dollars and high percentage multiples.
  • Founder-based: A VC may be excellent at driving returns for LPs, but did she help the founder or succeed? For many this is correlated, but for others it may not be — for example, an investor who is not the lead investor in a round and doesn't provide much help to the company but gets massive returns on a deal. Founders want an investor who can help strategize or solve problems and provide the best advice or resources. This type of valuable information isn't found on a list; it's passed around by word of mouth.
  • For other VCs: VCs want a partner who can help the company, but also play nicely with them.

Remember, the Midas List is only really a measure of the returns submitted to it.

The venture industry has changed massively in recent years. Besides SoftBank, Tiger Global, with a $6.7 billion fund, and other late-stage firms are throwing down big checks. Sequoia and other traditional funds now have multibillion-dollar funds. Parts of the industry have become a cash-based "asset management game," one VC said. Meanwhile, new seed funds are seeking out the next Uber or Snowflake at the idea stage. Measuring those types of firms against each other, or even considering them the same type of investment, may require rethinking what venture is in the first place.

A MESSAGE FROM LENOVO

The pandemic upended life as we knew it. Most of us experienced the abrupt shift in the way we work, learn and connect, with blurring lines between office and home. While the future of work continues to evolve, the focus on a more engaged and fulfilled workforce will outlast the pandemic.

Learn more

Inside Track

  • Everyone loves to hate on Tiger Global, but there's a reason "why Tiger is eating your lunch (& your deals)," said Founders Fund's Everett Randle. Tiger is playing an entirely different game than everyone else in VC.
  • More makers and creators are getting rich now, instead of the deal-makers, writes Paul Graham.
  • How do you turn $300,000 into more than $2 billion through Coinbase? Garry Tan tells his story and shows some early 2012 emails he sent to Brian Armstrong.

Need to Know

  • Who made money (and who sold) in the Coinbase direct listing. Andreessen took advantage of Union Square Ventures and Ribbit Capital's decision to sell some shares in 2019 and boosted its stake in the crypto company — a position that paid off.
  • Grab to go public via largest SPAC. The deal led by Altimeter Growth Corp. will value the company at nearly $40 billion.
  • General Catalyst hires a top banker. A 20-year veteran of Morgan Stanley, Paul Kwan led its West Coast tech investment banking before joining General Catalyst as a managing director.
  • Back to the (Faraday) future. The EV maker went from near death to riding the SPAC wave that would value it at $3.4 billion without ever selling a car.
  • Feeding frenzy. The delivery wars are back, but this time it's a competition for who can deliver groceries rapidly to your door.
  • From Protocol: Alfred Chuang was the "CEO's CEO" of Silicon Valley. Now he wants to make his name as a VC.
  • This week in VC history: A year ago, Opendoor laid off about 600 employees, or about 35% of employees amid the pandemic.
  • Your weekend reading: Everything is made more interesting in space, including trash removal and the growing problem with space junk.

Five Questions With...

Cowboy Ventures' Jomayra Herrera

Jomayra Herrera is a principal at Cowboy Ventures, an early-stage firm. She was previously an early investing hire at Emerson Collective, working with companies such as Handshake and Career Karma, and has worked at BloomBoard, an ed-tech startup. She focuses on investments in the future of work, ed tech and consumer digital health.

What's the biggest issue your partners are talking about at your Monday partner meeting?

There are two trends that we're [constantly] chatting about. The first is thinking hard about the ways the pandemic has shifted what companies want to purchase and consumer behavior — and what will stick post-COVID. The other is the pace of the market. Deals are moving faster than ever, and we are trying to balance making sure that we are doing enough work to generate conviction while also ensuring that we can invest in the best companies.

What product or service are you totally, even irrationally, loyal to?

I don't know if this is loyalty as much as it's an addiction: I have an almost unhealthy obsession with TikTok. I use it for entertainment, to find new restaurants and even to find cool things to do near me. If you ask any of my close friends, they will tell you that they get a curated list of great TikToks into their DMs every night.

What problem do you want to see a startup solve?

This is going to sound super nerdy, but I have been on the hunt for a company that addresses internal mobility (moving talent within a company) in a comprehensive and effective way. The demand from employers is higher than ever before, and the tools are still nascent.

What company or startup sector is the most underrated right now?

Family tech. This year has shown that what we expect out of parents, particularly mothers, is unsustainable and has a direct impact [on] the productivity of our workforce. There is a lot of conversation around the future of work (I am one of the primary culprits!) but much less conversation on the future of care.

What's the biggest challenge you've had to overcome in your career/do you have a tip for others?

As someone who was the first in my family to go to college and a Latina, I've always felt I had to work twice as hard to get half as much as my more privileged peers. And, while this is true, I've also learned that treating others with dignity, respect and getting the things done that you say are going to get done go a long way — especially in a relationship-based business like venture.

Thanks for reading this week's Protocol Pipeline. If you like what you're reading, sign up here to get it in your inbox. Send story tips and newsletter feedback to tgeron@protocol.com.

Correction: An earlier version of this article misspelled Andy McLoughlin's name. This article was updated on April 19, 2021.

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