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1/21: I was listening to the 20 Minute VC podcast w/ @davidtisch as a guest. He threw out an important concept that most Founders don’t think about enough: “Is My Company A Top Half Performer?” This is a critical concept that’s worth unpacking: 
2/21: First, here’s a link to the 20 Minute VC podcast episode. It was a fun one to listen to and definitely one of the better interviews that Harry has recorded. https://twitter.com/HarryStebbings/status/1389355719900680193?s=20
3/21: Now for the “Top Half Performer” concept.
It starts with the unfortunate truth that most #startups fail. And this truism even applies to #startups that have already passed a VC’s process. Even after careful curation and diligence most VC backed #startups fail.
It starts with the unfortunate truth that most #startups fail. And this truism even applies to #startups that have already passed a VC’s process. Even after careful curation and diligence most VC backed #startups fail.
4/21: This means that Fund returns are driven by the companies that succeed. A VC can only lose his/her basis on a failed investment but a near infinite return can be generated by investing in a generationally important startup. The power law is something to respect.
5/21: But what’s also true is that at the time a VC writes his/her first check into a startup, they believe that the investment they’re making will generate a spectacular return. The nature of the asset class is that VCs happen to be wrong most of the time.
6/21: A VC underwrites to the “what if everything goes right scenario” and then the distribution of outcomes plays out IRL. At best things “go right” about 25% of the time and “kind of sort of go right” about 25% of the time. The bottom 50% of outcomes are disastrous.
7/21: As a result, every VC can’t help but naturally categorize their investments into buckets based on how they’re evolving. On day 1 they’re all in the same bucket (amazing potential), but over time investment start to differentiate themselves from each other.
8/21: Just ask a VC whether a company is one of their top investments. They’ll spit out the answer before you’ve even finished asking the question. The concept that “I can love all my children equally” doesn’t hold in the VC world. It’s too easy to rank and pick.
9/21: The important concept that Founders should internalize is that these dynamics are immutable and drive VC behaviors. To predict how your Investors are going to behave you should figure out whether or not you’re one of their “top half” performers.
10/21: While VCs want all their companies to succeed, it isn’t possible to support them equally. There are choices a VC has to make that favor some companies at the inevitable expense of others. Their companies don’t see these choices being made but rest assured they are.
11/21: Capital: There’s only so much capital to be allocated in any given Fund. A typical Fund sets aside capital for follow-on rounds and successful VCs allocate these reserves carefully. If they can allocate 50% of the capital to their top 25% of companies they’re doing well.
12/21: The converse is true as well. If they can minimize the amount of capital allocated to the bottom 50% of their companies then they’re doing well. And when a VC asks their Partnership to support a follow-on check, guess what question is asked? Is this a top performer?
13/21: Fundraising: A startup and its Investors go on a pretty special journey together. It’s not always pleasant but it is “the stuff that stories are made of.” But guess what? Investors are promiscuous. They play the field and go on many journeys at the same time.
14/21: In fact, over their careers they’ll go on dozens of journeys, only one of which is with a particular startup. So guess what they value? Relationships with other Investors because they’re likely to encounter them elsewhere and elsewhen.
15/21: This means that the best Investors default into being “truth tellers”. Investors talk shop and are typically honest with each other. The last thing an Investor wants is to be known as “Honest John” or “Honest Jane” who says all their companies are amazing.
16/21: This isn’t universally true, but in tight ecosystems it is. In spaces where early stage Investors talk to the same down-stream Investors regularly, a common question to ask is: “Is this one of your best performing companies?”
17/21: And these same down-stream Investors routinely look for financial signaling from early stage Investors they know and trust. Are they following on? Are they doubling down or just committing to pro-rata? How committed are they?
18/21: Introductions: One of the most common requests that startups ask from their existing Investors is to open doors and make introductions. They want access to potential customers as well as to talent that can fill critical roles.
19/21: But guess what? A given Investor can only tap their resources so many times. When talent surfaces, guess where it gets pointed first? When intros need to be made to Corp Dev/Biz Dev groups, guess which intros get prioritized?
20/21: The list goes on and on about why it’s important to be in the “top half” of a VC’s portfolio and how it drives the various seen and unseen actions that a VC makes based on this categorization.
21/21: The TL;DR: While it may be awkward for a Founder to discuss this topic in the open with his/her major Investors, the insights that it will generate can be worth it. The discussions can be managed professionally and might even create stronger bonds on the other side!
