Investing in Venture Capital? Think More About the Manager than the Deal

Ever notice that when people talk about investing in venture capital, discussion usually turns to “The Deal,” the hot start-up that will cure a disease or change lives with some new phone app?

Sure, there are some hot deals, but remember – around 80% of them won’t make you any money. You could get lucky . . . or maybe not. If those hot deals were so predictable, any of us with access would be on our way to becoming billionaires.

I admit it. I’m not a billionaire. But I’ve done pretty well by making many investment decisions based on simple criteria: who’s the investment manager, what has his or her track record been . . . how consistently . . .  and for how long?  That’s how I selected my financial advisor.  That’s how he and I select which specialists to entrust my asset-allocated dollars to.  And that’s how I decided who would handle my venture capital investment dollars.

As a strategic marketing advisor to a venture capital firm myself (but not personally a venture capital or even financial services pro), I get exposed to lots of ventures and am sometimes asked for my thoughts on their attractiveness.  Nevertheless, I don’t feel qualified to say with confidence which ones will win or how big they’ll win. Hence, my own investments are usually at the overall fund level, spread across a number of the fund’s deals. Since usually only about 20% of ventures win, I want enough diversification to feel I’m investing, not gambling.

The firm I work with currently is a new one called VCapital, just in the process of launching.  However, its manager, Len Batterson, is NOT new. Len and I earned our MBA’s together 42 years ago. While other classmates are also in the venture capital field, I chose to hitch my wagon to Batterson’s because his long-term track record is exceptional.  Notwithstanding the standard legal disclaimer that “past performance is no guarantee of future results,” according to CB Insights, “In venture capital . . . past performance actually is an indicator of future performance.”

Not every Batterson deal is a winner.  He’s not a fortune teller . . . though he’s helped many savvy investors get a lot richer.  Across the four funds he’s managed over his 30+ year venture capital career, 41% of his deals have made money, an extraordinary record.  Think about a baseball player with a lifetime batting average of 410.  He’d be enshrined in the Hall of Fame the moment he became eligible.

Some of Batterson’s deals have been really big winners.  Two achieved values exceeding a billion dollars – AOL and Cybersource.  Cumulatively, his funds have delivered investor returns averaging approximately 29% per year.  Even his lowest-performing fund returned 13.5% per year over an 11-year time frame.

Along with that superb performance comes impeccable integrity. While we don’t often think about that, a recent Wall Street Journal article reported an alleged theft of $65 million by Oak Investment Partners’ youthful partner Iftikar Ahmed, whose fraudulent acts are believed to have begun almost as soon as he joined the firm in 2004. Based on what I’ve read, it’s not clear whether the $65 million came out of the pockets of the Oak Investment Partners or from their investors.

I’m not suggesting you need to be concerned about thieves lurking behind every corner.  Most of the people in venture capital, as in any field, are honest.  But Batterson’s 30+ year track record, in funds without a lot of unproven junior partners, certainly lets me rest easy.

Recent venture capital news included a deal AngelList announced with China-based private equity firm CSC Venture Capital to establish a new $400 million fund to be invested in early-stage startups over roughly a 10-year period. That’s great for budding entrepreneurs.  However, AngelList’s approach, collaborating with a large number of individual syndicate leaders, most of whom look awfully young on the website photos, interests me lots less than investing with a long-term all-star.  No doubt these syndicate leaders are smart, and many have had some impressive successes, but have any had Batterson’s 30-year track record?

While he doesn’t run around in jeans and hoodies, Batterson hasn’t lost his touch after 30+ years.  Earlier this month IBM announced it had completed its acquisition of Cleversafe, Inc., a leading developer and manufacturer of object-based storage software and appliances. Batterson’s existing fund, Batterson Venture Capital (BVC), was an investor in Cleversafe’s Series A round. Hence, while the terms of the IBM deal are confidential at IBM’s insistence, suffice it to say I’ve seen lots of Cleversafe/BVC investor smiles. When the ink has dried, I wouldn’t be surprised if Batterson’s 30+ year average annual return moves still higher.

I’m one of those smiling BVC investors.  And I expect to smile about my Batterson-led VCapital investment too.