The Keith Arundale Website

Draft for discussion purposes only

These best practice guidelines for venture capital investing are derived from my recent research into venture capital fund performance and the investment practices of VC firms in Europe and USA. The research is the most up to date, complete and extensive qualitative review of the entire VC investment process featuring interviews with 70 VC investment executives from 64 separate venture capital firms in Europe and USA supplemented by interviews with 40 other stakeholders (limited partner investors, entrepreneurs, advisors and corporate VCs).

The best practices for setting up and running a VC firm, which may help to improve performance if appropriately adopted, are categorised into structural, operational and wider environmental headings below. Full details on the research on which the guidelines are based can be found at:   
http://theses.gla.ac.uk/view/creators/Arundale=3AKeith=3A=3A.default.html

Structural 

• Funds should be of adequate size to provide initial and follow-on finance in order to allow young, high-growth businesses to grow and scale.
• Sector expertise of investment partners permits better deal sourcing, in-house due diligence and value adding activities.
• Taking the risk and investing early at the seed stage, maybe in syndicate with other VCs, may result in investments with outlier performance.
• Investing in the local geographic area may help better overall fund performance because of tighter networks and in-depth knowledge of local opportunities.
• Partners with entrepreneurial / operational backgrounds help facilitate the investment process through knowledgeable deal sourcing and adding value to portfolio companies post investment.
• Partners working together on deals facilitates the sharing of information and expertise.
• Venture partners, additional to the main investment team can bring additional resource to deals with specialist skills and knowledge.

Operational

• Pursuit of a higher risk, “1 in 10” investment strategy can lead to outlier returns through “home runs” and contribute to superior performance.
• Use of milestone financing, or “drip-feeding” investments, can help minimise risk exposure on an investment.
• Following a theme-based approach to investment trends may contribute to superior performance as may a focus on disruption in terms of technology, market or business model.
• Brand name, profile and track record help to attract better quality deals which can lead to better fund performance.
• Due diligence carried out in-house by sector specialist investment executives may be more effective, and less costly, than due diligence carried out by external advisers.
• Investment decisions should be made by the investment team, not by people external to the process. Use of consensus in decision making can remove the outlier investments and depress returns; deals “railroaded” through by senior partners may enhance returns.
• Investment terms should be as entrepreneurially friendly as the local competitive environment permits.
• Syndicating with VCs who are known to the investor aids better alignment of interests and less conflict between syndicate members. Effective collaboration with other VCs in pooling of expertise and knowledge about a deal can lead to better outcomes with due diligence and improved value add.
• Use of a metrics based approach to monitoring portfolio companies and weeding out poorer performing investments soonest contributes to better investment outcomes and improved fund performance.
• The in-house resources that VCs can bring to bear on their investments through value adding activities should contribute to overall improved performance, although the best investments may be where VCs have to add the least value because the companies are well-performing.
• Exiting too early from an investment should be avoided if at all possible; waiting for the best exit can help achieve optimal gains.

Wider environmental 

• A “thinking big”, ambitious culture, combined with a higher propensity for risk, can lead to outstanding returns.
• Open networks encourage information sharing and hence better knowledge of new technology developments and markets in contrast with a more closed and proprietary approach. Regulatory and legal environments, including copyright laws, need to be conducive to innovation.
• Extensive networks between VCs, entrepreneurs, large technology companies and other stakeholders, and a non-proprietary willingness to share time and resource in a “giving back” culture, help achieve better overall performance.
• A good supply of experienced CEOs and repeat entrepreneurs are needed to run high growth potential venture backed businesses. 
• Luck is an ingredient of success in VC investing; however a major component of VC success can be attributed to skill in recognising a serendipitous opportunity and capitalising on it.

Incorporating these guidelines into the structure of VC firms, their operational activities in terms of investment practices and the environments in which they operate may help to improve performance, although this is of course not guaranteed!      

Copyright © 2019-Keith Arundale-All rights reserved

Disclaimer: The above guidelines are based on the author’s research into venture capital investment practices and fund performance in UK, continental Europe and USA. This research engaged a purposive sample of some 70 VC firm investment executives from 64 separate VC firms and 40 other stakeholders. The findings are specific to this sample and not necessarily representative of the wider population of VC firms. The information included in the guidelines has been prepared for general interest only and does not constitute professional advice. You should not act upon the information contained herein without obtaining specific professional advice. The information reflects the views of the author and does not necessarily represent the current or past practices or beliefs of any organization. The author is not engaged in rendering accounting, business, financial, investment, legal, tax or other professional advice or services whatsoever to the readers of these guidelines. Accordingly, to the extent permitted by law, the author accepts no liability, and disclaims all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained herein or for any decision based on it.

Please send your comments to me here or email: keith@keitharundale.com