Blog Archive

11 November

Red Herring | STEVE LISSON

How to rate a venture capital firm
By Lawrence Aragon
April 16, 2001

Red Herring explains how it came up with its list of top venture capital firms
for the 2001 version of the Red Herring 100: Kleiner Perkins Caufield and
Byers, Accel Partners, Matrix Partners, Sequoia Capital Partners, and runner-
ups Oak Investment Partners, Mayfield, Greylock, Menlo Ventures, North
Bridge Venture Partners, and Benchmark Capital.

Venture capital is like baseball without the stats. There are great arguments
about who's the best -- and worst -- VC around. But unlike baseball fans, those
who follow venture capital have scant data on which to base their opinions.

Until now.

As part of our annual Red Herring 100, we set out to determine the top ten VC
firms using the best metrics we could come up with. To our knowledge, this is
the first time anyone has come up with a list based on more than a single
metric, such as the internal rate of return (IRR).

Before we get into each of the ten factors we examined, allow us a brief
explanation as to why we didn't include the most common metric: IRR. IRR is
a number determined by each VC firm, and although it's bandied about
frequently, it can be easily tweaked to make a firm look like it's doing better
than it actually is. It isn't uncommon for a VC that isn't performing very well to
inflate its IRR by counting its own "carry," the money it makes from
investments, into its IRR.

The only real way to know how a VC firm is performing is to look at its
disbursements to its limited partners (LPs). This is the actual stock or money
that VCs get from a liquidity event -- that is, a portfolio company's IPO or its
sale to another company. The only problem is, VCs don't want to share this
information.

Enter Steve Lisson, editor of InsiderVC.com, a venture capital research firm.
Mr. Lisson has been able to infiltrate the closemouthed community of LPs and
get its members to share disbursement figures. We asked Mr. Lisson to come
up with a list of the best ten VCs in the country, based on disbursements to LPs
and how consistently they have returned the big bucks to LPs.

Here, then, are the top ten venture capital firms: Kleiner Perkins Caufield &
Byers, Accel Partners, Matrix Partners, Sequoia Capital Partners, Oak
Investment Partners, Mayfield, Greylock, Menlo Ventures, North Bridge
Venture Partners, and Benchmark Capital. The top four firms (the first four
listed) made it into the Red Herring 100. Now, on to our criteria: underneath
the chart just below we review in depth the ten factors we rated the companies
on.

1. Kleiner Perkins Caufield &
Byers 10 10 10 6 10 9 10 5 10 109.09
2.Accel Partners 9 9 8.58 10 9 9 5 10 108.77
3. Matrix Partners 9 10 10 9 5 10 10 10 4 6 8.36
4. Sequoia Capital Partners 6 10 9.5 8 10 7.5 10 5.5 2 4 7.14
(tied) Oak Investment
Partners 8 10 6.5 10 2 5 10 7 2 107.14
(tied) Mayfield 7 10 9.5 7 10 8 10 6 0 4 7.14
7. Greylock 6 10 10 9 4 9 10 7 6 0 7.00
8. Menlo Ventures 8 10 5.5 8 3 10 6.5 7.5 2 2 6.41
9. North Bridge Venture
Partners 7 3.5 10 7 6 9 8 9.5 0 2 6.27
10. Benchmark Capital 7 3 6.5 7 3 8 1 4 10 2 5.32
Average7.7 8.55 8.6 7.9 6.3 8.45 8.45 6.65 4.6 5 7.26

1 The disbursement category is weighted twice that of other categories. Data from Steve Lisson,
editor of InsiderVC.com.
2 Operating experience counts VP level and above.


Disbursements.

Mr. Lisson gave a score of 10 to just one VC firm: Kleiner Perkins Caufield &
Byers. Benchmark Capital, which has had some monster hits in the past couple
of years, scored a 7, because it has only been around for six years.

Longevity.

In the venture business, age counts for a lot. It means a firm has been battle-
tested and has done well enough to get its LPs to continue investing. We took
each firm's number of years in business and divided that figure in half to come
up with a score (with a maximum score of 10). Six firms earned a 10. Two firms
came up short: Benchmark and North Bridge Venture Partners, with scores of
3 and 3.5, respectively.

Pressure to invest.

A general partner is better off if there isn't pressure to put a lot of money to
work. We divided the amount of a firm's current fund size by its number of
general partners, then assigned a value to the resulting figure. After talking to
several VCs, we determined that $90 million per partner was reasonable to
assign a score of 10. We gave a 9 to anyone managing $110 million, an 8 to
those managing $130 million, and so on.

VC experience.

This should be self-explanatory as to why it's important. We gave general
partners with 15 years or more of experience a score of 10. Those with 12 to 14
years received a 9, and so forth. Oak Investment Partners came out on top in
this category, with an average of 17 years for its partners. Even though Kleiner
has at least three partners with more than 20 years of experience, its score got
knocked down to a 7 because it recently added some technology executives to
its partnership.

Operating experience.

With so many portfolio companies in trouble these days, every VC firm needs
partners who've been in the real world to advise troubled companies. We gave
each firm a point for any general partner with operating experience, plus a
bonus point for any partner who qualified as a "star." General partners who fell
into the star category include Kleiner's Ray Lane, former president and chief
operating officer (some say the de facto CEO) of Oracle, and Mayfield's Janice
Roberts, who ran Palm when it was a division of 3Com.

Board seats.

Six boards is the maximum number you can sit on and still actually contribute
valuable time and energy, we're told by veteran VCs. Menlo Ventures and
Matrix Partners were the only firms whose partners sat on an average of six or
fewer boards, giving them perfect 10s. We gave firms whose partners held an
average of seven to eight board seats a score of 9, and so on. Oak fared the
worst: its six general partners sit on an average of 12 boards each.

IPOs/Sales.

This is one of those categories that VCs like to brag about, but it can often be
misleading. Two firms may be in the same IPO, but one may own 15 percent of
a company while another owns 1 percent. The only real way to know how well a
VC did in an IPO is through disbursement figures. Still, we felt we should give
VCs some credit for liquidity events. We gave a firm one point for every $1
billion in value, with a maximum of 10 points for $10 billion. IPO figures were
based on the close on the first day of trading. Sale prices were based on the
value on the day the deal closed. A lot of moonshot IPOs have fallen back to
earth, so this category is squishy at best.

Lack of portfolio problems.

Matrix was the only firm on our list that had no failed or troubled companies.
We gave each firm 1 point for every failed company and half a point for every
company that had laid off employees in the past year. We then subtracted that
total from 10. Benchmark fared the worst in this category with a score of 4.
Blame it on those Internet bets like Living.com, MVP.com, and Send.com.

RH 100 factor (2000 and 2001).

VCs deserve credit for portfolio companies that show great promise. Because
the staff of Red Herring spent weeks vetting all of the companies that made the
Red Herring 100 list, we used the private portion of the list (50 companies) in
2000 and 2001 as a basis for determining potential hits. For every portfolio
company on the Red Herring 100, we gave a firm 2 points, with a maximum of

10. Kleiner and Accel Partners were the only firms to receive 10s for both years.
Kleiner had the most companies on this year's list: Zaplet, Epoch, Synaptics,
SmartPipes, Asera, and Bowstreet.
As much time as we spent thinking about how to create a top ten VC list, and
then double- and triple-checking the data, we'd be nave if we didn't expect
some VCs to take issue with our numbers or our methodology. So, don't feel
shy about expressing your opinion.

Write to laragon@redherring.com.

Note: In the "Top 10 VC Firms" on page 185 of issue 97, Menlo Ventures
should have been ranked No. 8 and North Bridge Ventures should have been
No. 9. In addition, we did not make it clear that three firms tied for 4th place:
Sequoia Capital Partners, Oak Investment Partners, and Mayfield. The data
is correct here.

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