The Clubby World of Venture Capital

As an entrepreneur who previously worked in VC, I’ve become fascinated by how much investors rely on each other to get comfortable with deals. I’ve always observed venture investing to be a “clubby” game where politics, rivalries, and friendships play a large role in how companies get funded.

I decided to test my theory by looking at the data. I used RJMetrics dashboards to analyze data from Crunchbase, a public database of VC deals. This data included investment history for over 12,000 venture-backed technology companies and their 6,000 investors. (Note that Crunchbase is a community-edited resource that is not fully comprehensive and includes sparse data before the early 2000’s. Despite this, we believe it to be a representative population of modern venture investments.)

Here’s what I found:

  • 60% of venture-backed companies have more than one investor.
  • Among firms who have made at least 50 investments, the average firm is the sole investor in just 10% of their portfolio companies.
  • Prolific co-investors like SV Angel and DAG Ventures are the sole investor in under 2% of their investments.
  • Benchmark Capital may be the most cliquey investor when it comes to co-investing with other leading firms. They share 36 investments with DAG Ventures (more than any other pair of highly active investors) but only one with Draper Fisher Jurvetson (fewer than any other pair).
  • Well-known firms like Kleiner Perkins, First Round Capital, and Accel Partners appear to keep it in the family, investing in the highest number of companies with the smallest number of distinct co-investors.

Lone Rangers and Socialites

According to Crunchbase, 60% of funded companies have taken money from more than one investor. This may seem high, but it makes sense if you consider that seed-stage investments are increasingly being made by syndicates of angel funds and later-stage investments are almost always follow-ons to investments made by other investors.

So, who are the lone rangers who are investing in the other 40% of companies? We looked at the percentage of “solo investor deals” made by firms with at least 50 investments to find the answer.

The average firm was the lone investor in only 10% of their portfolio, but Edison Venture Fund topped the list by investing alone on 53% of their companies. Next was German VC High-Tech Gruenderfonds with 42%, followed by a steep drop-off with Austin Ventures at 28%. (Note that there may be some sampling bias here. I suspect that High-Tech Gruenderfonds may have such a high number because the investments of other European VCs are under-represented in Crunchbase.)

On the other end of the spectrum, Jafco Ventures and Sutter Hill Ventures each have 59 investments but were not the sole investor in a single one of them. DAG Ventures was the sole investor in just 1 of their 101 portfolio companies, and SV Angel was the sole investor in just 2 of their 147 investments.

Best Friends and Worst Enemies

Some investors appear to get along very, very well. Benchmark Capital and DAG Ventures share a whopping 36 investments, more than any other pair of investors in Crunchbase. Lerer Ventures and SV Angel, who openly share deal flow, come in second with 30. (Disclosure: SV Angel and Lerer Ventures are investors in RJMetrics)

So what about the investors who were least likely to work together? We used RJMetrics to isolate every possible pairing of the 10 most active investors and found the answer. Among these 45 pairs, the average pair has made 7 investments together and every pair shares at least one portfolio company.

However, Benchmark Capital and Draper Fisher Jurveston only share a single investment (Prosper). Next in line is Benchmark Capital and Kleiner Perkins, who only share two (Friendster and Good Technology).

Benchmark is an interesting case here because it is part of both the most and least frequent investor pairs, despite being only the 10th most active investor overall. Playing in these extremes suggests that Benchmark may be the most cliquey investor in Crunchbase.

Welcome to the Club

So, who are the clubbiest VCs? To quantify this, I looked at the number companies a firm has co-invested in vs. the number of distinct firms it has co-invested with. In other words, this “clubbiness ratio” grows higher as a firm invests in more companies alongside the same tight network of co-investors.

To reduce the noisiness of the data, I only included firms who had co-invested in at least 50 companies (there were 77 of them).

While the average ratio was six investments per co-investor, SV Angel topped the list with a whopping thirteen. Next up was a four-way tie at ten companies per co-investor between Kleiner Perkins, DAG Ventures, First Round Capital, and Accel Partners. Sequoia Capital and NEA were next with nine companies per co-investor.

Sierra Ventures had the lowest ratio at 3.3 companies per co-investor. The only other funds with ratio below four were Rho Capital Ventures (3.7), BDC Venture Capital (3.7), and VantagePoint Venture Partners (3.8).

It’s noteworthy that the high-ratio group includes some of the best known and most successful firms out there, whereas the middle of the pack is full of lesser-known players who still do a high volume of investments. In other words, it appears that many of the most prolific investors are also the clubbiest.

Conclusion

In case there was any lingering doubt, industry politics and personal networks are a major factor in how venture capital deals get done. However, the data from Crunchbase suggests that the networks of investors may be just as influential as the networks of the investees.

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  • Rich

    Yesterday I was surfing along Google Earth, go south out of San Francisco on 280 to the Sand Hill Road Interchange. Now go east on Sand Hill Road and I counted 44 marked V.C. co’s in the first mile. With them all clustered together in such a small area it doesn’t seem too strange that they co-invest.

  • http://sundarsubramanian.com sundar

    did not having easily consumable graphs have anything to do with this post not getting too much attention on HN ?

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