Top Venture Capital Firms: How to Judge Which Are Best for You

Mechanism

Published lists of top venture firms disagree because they measure different things. One may rank by assets under management, which reflects fundraising success. Another may rank by the number of companies that reached an exit, which favors old, large firms. A third may rank by net returns to limited partners, which is rarely public and arrives years late. A founder who wants the best firm for a particular company should replace the question "who is on the list" with "which firm gives this company the best outcome," and then test candidates against criteria that fit the company.

Six criteria cover most of the decision.

• Fit: does the firm invest at this stage, in this sector, with this check size?
• Track record: what did the partners' past investments return, and what did the individuals contribute?
• Ownership and economics: what stake and board role does the firm expect, and what terms does it propose?
• Value added: can it help with hiring, customers, follow-on capital and later rounds? See operator-led venture capital.
• Reserves: can it invest again when the company needs it? See venture capital portfolio management.
• Reputation among founders: how do founders in its portfolio, including those whose companies struggled, describe working with it?

Worked Example

Consider a hypothetical founder comparing three firms, labeled A, B and C. The founder weights the criteria out of 100 and rates each firm from 0 to 5. A weighted score is the rating divided by 5, multiplied by the weight.

Firm B scores highest at 81.0, yet it scores lowest on fit, and fit decides whether a firm will invest at all and understand the market. A better method sets a minimum for fit and then compares the rest. Firm C has the strongest economics but weak reserves, which means that the company may have to find a new lead in its next round. Firm A fits best and has adequate reserves, so it is a reasonable choice if its track record can be explained. The exercise is useful because it forces the founder to write down which criteria matter, not because the totals are precise.

Top Venture Capital Firms and the Limits of Rankings

Past results are useful evidence but not a guarantee. Kaplan and Schoar, in Private Equity Performance: Returns, Persistence and Capital Flows, found that a partnership's performance in one fund relates to the next. Harris and co-authors, in Has Persistence Persisted in Private Equity?, found that venture capital persistence holds even when measured on the information an investor has at fundraising. A firm's reputation can also outlast the team that earned it. Founders should ask which partners made each past investment, whether they are still at the firm and which partner would join their board.

Do not accept a firm's description of its own rank. Check the firm's regulatory filings on the SEC's Investment Adviser Public Disclosure site, speak with at least three founders it backed, and read about firm structure in venture capital firms. This entry names no firms and ranks none, because a ranking would require a method and data that change every year.

What It Means for a Limited Partner

Limited partners face the same question from the other side: which managers deserve their capital? They face the same trap, too, because brand and recent fundraising success are poor proxies for the next fund's results. A disciplined allocator applies a written framework, scores each manager on the same criteria and reviews the result with someone who did not run the first review, as described in Operational Due Diligence in Private Equity. It checks that the individuals responsible for the record remain in place, and that fund size has not outgrown the strategy. It also considers capacity: the best managers may not have room for a new investor, and a limited partner should not mistake scarcity for quality. The question to answer is whether the manager's process can repeat. For a founder, the practical test of fit is described in best VC firms for SaaS startups.

In Life Sciences and Healthcare

For a life sciences company, the best firm is often the one with partners who have taken a similar product through the same regulatory path, and with reserves to carry the company through trials or clearance. A founder should ask how many of the firm's healthcare companies reached approval or commercial sales, and who on the team has reviewed clinical or reimbursement evidence. A generalist brand may open doors, while a specialist may add more value to the science and the next financing.

Frequently Asked Questions

How are top venture capital firms ranked?

Rankings use different measures: assets managed, number of exits, deal counts or reported returns. Because methods differ and returns are often private, no list is definitive. Founders get better answers by defining criteria that fit their company and scoring candidate firms against them, as in the example above.

Is the largest venture firm the best choice for a startup?

Not necessarily. A large firm can write big checks and support later rounds, but it may need very large outcomes, and its partners may sit on many boards. A smaller specialist can offer more attention and better fit at an early stage. The right choice depends on stage, sector and what the company needs next.

What should a founder ask a venture firm before accepting a term sheet?

Ask which partner will join the board, how many boards that partner sits on, how much capital is reserved for follow-on rounds, what happened in the last portfolio company that missed its plan and how decisions are made. Then speak with founders the firm backed, including one who had difficulties.

Related Reference

Rankings are one input; the mandate of each investor is better understood through growth equity. Related entries: Emerging Manager, Operating Partner and Key Person Provision.