Any seasoned investor knows that past performance is not indicative of future returns. That is as true with public stocks as it is with venture capital firms. But if someone were to ask you to rank the top VC firms today based on their probability of success, how would you do it? Remember, looking at past returns won’t help you.
Chris Farmer, a VC at General Catalyst Partners, has come up with a method which he calls InvestorRank. Just as Google’s PageRank orders search results based on how many links each page gets from other sites, InvestorRank looks at the connections between VC firms. Whenever two VC firms co-invest in the same deal, that creates a bond between them. If one VC firm follows another one in a later round, that boosts the rank of the earlier investor.
The more that a VC firm invests in syndicates with other highly ranked firms or even before they do, the higher its InvestorRank. There is some research which suggests that mapping out the network of investors is a better way to predict performance. InvestorRank is not based on previous returns. Rather, it is based on how connected and trusted a VC firm is.
Today at TC Disrupt NYC, Farmer revealed the top 10 VC firms based on InvestorRank. They are:
- Andreessen Horowitz
- Sequoia Capital
- Accel
- Benchmark Capital
- Union Square Ventures
- General Catalyst Partners
- NEA
- Kleiner Perkins
- Khosla Ventures
- Greylock
What is interesting about this ranking is that not only is Andreessen Horowitz on top (a relatively new firm), but that Kleiner, perhaps the most storied VC firm of all, is near the bottom. Union Square Ventures is smack dab in the middle at No. 5.
If you look at the top VC firms to emerge over just the past ten years, Andreessen Horowitz is still No. 1, but Union Square jumps to No. 2. The full list is:
- Andreessen Horowitz
- Union Square Venture Partners
- General Catalyst Partners
- Khosla Ventures
- First Round Capital
- Spark Capital
Much of the data Farmer used to analyze investor networks comes from CrunchBase. Below is a deeper dive into the data for the top 15 VCs. It breaks down co-investors by class—top 10, top 25, top 50. The top firms (blue and purple) tend to stick together and invest in the same deals.
COMMENTARY: It's astounding what Andreesen Horowitz founders Marc Andreesen and Ben Horowitz have done since they became venture capitalists. Between 2005 and 2009, Ben Horowitz and Marc Andreessen separately and together made a series of 40 angel investments in early stage technology companies primarily in Silicon Valley.
In June 2009, Ben and Marc created the venture capital firm named Andreessen Horowitz with an initial capital fund of $300 million. In September 2009 the firm invested $50 million for 2% of Skype stock. For the record, Skype was acquired by Microsoft in May for $8.5 billion. Nice exit. with an initial capital of $300 million.
They also own stock of Zynga, Digg, Foursquare and other high-tech companies. At the beginning of November 2010, the company announced that they raised another $650 million for a second venture fund. In February 2011, Andreessen Horowitz invested $80 million in Twitter, by acquiring Twitter stock in the secondary market for stock of private company's.
Andreesen Horrowitz is the first venture firm that holds stock in all four of the highest-valued privately held social-media companies: Facebook, Groupon, Twitter and Zynga. Groupon and Zynga have already announced plans to file for an initial public offering. Twitter is not ready for an IPO, but Facebook is mulling the idea as their valuation recently reached $78 billion.
From the looks of things, Andreesen Horowitz is firing on all cylinders, making late stage investments in very high-profile startups, with plans for an IPO in the immediate future. If this keeps up, they will be a multi-billion dollar VC firm.
My major criticism of Andreesen Horowitz is that they are almost completely investing in internet startups. If a second Dotcom bubble should hit, they are very exposed. In June 2010, they made a $20 million investment in foursquare. They are now considering making another $20 million investment, valuing foursquare at $250 million. In a January 29, 2011 blog post, I was very critical of this potential investment, because location-based social networks have experienced huge adoption and privacy issues, have a huge gender gap, and none of the major LBSN's have generated much in the way of revenues.
Courtesy of an article dated May 25, 2011 appearing in TechCrunch
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