Q&A: Junior VC Performance & Investment Metrics - E310

Jeremy Au and Adriel Yong talk about performance metrics and expectations for junior VCs and investors. Throughout the conversation, three primary themes emerge:

1. Understanding Performance at the Fund Level: Jeremy breaks down performance at the fund level, discussing five essential tasks that a fund should excel in: raising capital, sourcing companies, making judgment calls on investments, aiding companies in their growth, and deciding on the right time to exit an investment. The focus is not only on the outcome metrics but also on the process and understanding of the entire lifecycle of an investment.

2. Coaching vs. Measurement Perspective: For junior VCs, it's not merely about meeting certain benchmarks. The more important aspect is their growth trajectory. Jeremy emphasizes the difference between the measurement perspective, which is about hitting certain KPIs, and the coaching perspective, which is about personal and professional growth. The goal should be to grow in capabilities across all dimensions of venture capital, ensuring that the individual is well-prepared for more senior roles in the future.

3. Time Lags and Learning in VC: Jeremy explains that Venture Capital involves long time horizons, and outcomes of investments can take years to manifest. This poses a challenge for both junior VCs trying to learn and for their mentors attempting to teach. A decision that seems right today might not bear fruit for several years, and the lessons to be learned from that decision might take even longer to become apparent. Jeremy points out that while some aspects of VC, like raising capital and sourcing companies, can be measured relatively quickly, others such as judging the potential of a company, helping it grow, and deciding when to exit, are subject to these time lags.

Jeremy and Adriel also touch upon the role of cognitive biases in decision-making, the unpredictable nature of the venture capital landscape, and the importance of continuous learning and adaptability in this fast-paced environment.

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Jeremy Au: (01:12)

Hey, good to see you. We're going to do another Q&A conversation. So let's get started.

Adriel Yong: (01:19)

Yeah, very excited to do this Q&A again. I've talked to a lot of my friends in venture quite often, and I think one of the most common questions that come up amongst dinner table conversations is that, What does performance actually look like for junior VCs and investors, especially when the timeline and horizon is so long, from actually seeing returns, from the point you make an investment?

Jeremy Au: (01:44)

Yeah, there are many ways to think about it. Obviously there's the output metrics. So we're thinking about number of deals, number of meetings, number of company source, number of deal notes plugged in. There's the output side, but I think we got to stay, take a step back and actually ask ourselves, what is performance at the fund level? And that's really important because I think a lot of these KPIs always flow downwards so what we know is that venture capital is an asset class, and it's supposed to be generating between 15 to 25% at these for net internal rate of return. So it's a turn of like multiple on the capital that was deployed to them via the limited partners. That being said, if we really think about it, then what does the fund need to do in order to be able, as an organization, to be able to carry out that mission. So there are five major things that the fund has to do. I think they have to raise capital number one. Two is they have to source companies in terms of information and who's fundraising. Thirdly, they have to judge and make the right decision about which companies to choose to invest in. The fourth is they need to help these companies be able to increase their enterprise value and grow customers and expand. And lastly is to figure out when is the right time to exit and wrap it up and collect some of that enterprise value that has been grown over time.

So I think that's really at a fund level. That's what the whole team, and I think that's probably most obvious, for example, at solo GP funds where there's one key decision maker who's doing all five of these things, maybe in partnership with a small team of people. So I think that's why a lot of emerging funds have that somewhat benefit, in a sense that everybody's incentives are aligned. I think where a trickiness comes in as we're discussing Is that when the fund gets larger in terms of, like you said, where there's more senior versus junior VCs, when there's more roles when there are more people who are coming in with different variables of experience.

Then I think the question then is how do these people map against those four key functions? And so of course what you mean by that is, I think the perfect senior candidate is someone who can do a firefighter, is able to fundraise with great velocity. Someone who has proprietary or high velocity of being able to source deals. Someone who's able to have strong judgment of the founder and the team, somebody who's able to help them a lot and help the company make the right decisions, but also decisions quickly and help them with the connections and resources needed. And lastly, have a good eye about when is a good time to exit as an investor.

So I think that's where the senior one is easy, but then of course, the question is, from a junior perspective, what is your performance metrics as a result? I think that's where the coaching perspective is quite different from the measurement perspective. I think the measurement perspective is you just divide it further, right? It's just like able to raise LP capital. Then you just say able to know who the LPs are, able to meet them, able to be confident and trust building, able to nurture that relationship. So there's a bunch of metrics that you can price subdivide that pillar down into those individual visual sites.

And you can do the same for sourcing. We mentioned earlier number of meetings. Who do you talk to? How many do notes, velocity? And I think there are VCs out there that are a little bit more quantitative about how they're measuring associates for example, into how that's being done. So I think that's relatively straightforward. And I think the truth is, if you and I sat down and we just wrote it out, it would be, probably 80 or 90% would be just aligned. Maybe there's a few more proprietary stuff but the truth is, if you're measuring all those things, I think you have a relatively good sense of where you are.

But I think the tricky part is that from a coaching perspective, we take a really big step back here is that I think there is a human element and then there is a confounding element, right? The human element is, I think what you just want to see is performance, basically looks like, do you see a junior investment teammate who is growing on those dimensions. So rather than the static measurement at that one point in time, but are they demonstrating that growth? And you talk about in terms of metrics, but are they showing the growth of their capabilities to do across those five domains and how fast are they doing it? And obviously there's a reflection of their personal growth mindset.

So if I was talking to individually, I would say Hey, don't worry too much about your individual metrics per se. I would say, Hey, if I look at you today as a junior associate versus what I expect a general partner to look like, these are things that I would really want to see, right? I want to see charisma. I want to see that you are someone that founders respect and able to support. I want to see that you are somebody who understands their mistakes and able to learn from them. So those are the different, I think, coaching mindset is much more important. And I think if you have that mindset, then you know it becomes a marathon rather than a sprint about how you can improve yourself as a VC, not just at that one fund, but across maybe multiple funds, but also across multiple roles, because you can be a junior VC who becomes an operator, who does an MBA, and then, you know, it goes back to being a VC, right? So there are different paths to get there, and so we don't need to limit yourself to that static snapshot of what you are, metrics of the month, right?

So I think that's one aspect about it, and therefore it's so important to work with people who are really there to coach you and mentor you and really be honest with you about how to get there. So I think that's one side, but I think what we also have to say is that there are very strong compounding factors in the venture capital scene that makes it difficult for this clear performance coaching to happen.

So for example, the biggest one that we see obviously is the time lag of learning, and so what is a good investment? Today in a point of investment could very much be seen as contrarian or seen as wrong by the market at a moment of investment, right? So there's a love and you even within an investment team, you may not have the same consensus. You may have different points of view. You may even disagree with your partner, for example, about what the right company is and so that's an important conversation to have because even a point investment is often contrarian because you're making a decision, nobody else made a decision.

But the second aspect that's there is that it takes time. Because even if you made the best judgment of that person, there are so many confounding factors. There are sub factors like the environment, right? Timing, the understanding of the market, personal circumstances, and the founder. So there's that error that happens that's just out of control, right?

And so obviously we see, for example, people who meet what they thought were good travel investments. That was contrarian at a point of time. But then later on, a lot of the companies got slammed by Covid, right? And so during that period then, performance was bad. Everybody thought it was a bad investment. And then some of those investments managed, survive, the pandemic pivoted and were able to grow and do great things and grew a lot. So I think there's that arc where it takes time, and the truth is, at a point investment, there's no way you could have predicted the next two years, four years, six years, eight years, 10 years.

But secondly, also, you don't really understand what the serendipity and the resources that you bring to bear on making that investment bear fruit. Now I'm saying all the stuff that I think a lot of VCs intellectually know, but let's just put it this way. It's like you're betting on a great founder, therefore the great founder, that's most of the work. So you're just measuring how great the founder is. You're not really measuring what an end outcome is. You're not having a time machine. So what that means is that it takes time as a result for the VC to learn what are lessons from the investment because you could take a lesson and start, you'd be like, oh, I'm right because I'm contrarian.

Then it can become like, oh, I'm wrong, because it turns out it's not doing well. So be, it's great now because they managed to make it work. And also there's a lot of cognitive biases because you sit down and you'll think to yourself like, oh, I was very positive about that deal, but everybody said no, and therefore the company has done really well.

So there's a lot of biases that kind of get compounded because of this time lag, so you have measurement error. This is the fact that you can't predict the future. There's cognitive errors. So what that basically means is that a lot of learning actually doesn't really happen for some of these domains. So what I mean by that is whether you're able to raise capital from LPs, obviously, that's a very clear performance metric. It's either you raise it now or you don't raise it, so I think it's very clearly measurable sourcing companies, to some extent. I mean, I think you can, if you're diligent about it, it's not really necessarily the number of meetings, but also the quality of those meetings.

That's something that you can improve relatively fast if you are thoughtful about it. I think the tricky part is that I think about the last three, these are really subject to that time, cognitive bias, but also we just don't know what's right and what's wrong, right? So like judging, which is the right company how to help them to the extent they need to the maximum extent possible and when to exit.

These are skills that take a long time to even know what the right answer is, and so you have these time lags in learning that make it problematic because that means that the people who are teaching you this stuff may not have fully incorporated lessons either because it's still work in progress. That's one.

And two, the whole community might be wrong because it still could be wrong. So I think there's a lot of that dynamic where at some level, I think the humility has to come in a little bit, where at the end of the day, For founders are at the forefront of the deployment of technology into the world, and VCs are gatekeepers who are at the frontier of this. So by nature of our job, we just cannot know with high certainty. Does that make sense? Because it's highly certain that we wouldn't be at the frontier, then we'll just be, wouldn't be at the leading age of this frontier. And so I think for me, as a result, when you think about performance now down to the junior level what I would say is the three key takeaways I would say is number one is at the end the level, performance is measured by the fund performance , which is your net, our r your capital. This report return to investors, which is broken down to I think, the five major components, which is, raising LP capital sourcing proprietary or the information judging and deciding the right companies. Supporting them to the greatest extent possible and managing an exit.

So that's really, I think the skillset domains you really have to think about. And then secondly I think it's less about the static dynamic, but more about focusing on the coaching and personal growth dynamic, which is how do I think about how to become, for example, a partner or general partner, a VC fund, and how do I look beyond that from a static measurement perspective towards how do I maximize that role across roles in the fund, roles outside the fund, different VC funds, different skill sets, different courses, but how do you build that total growth mindset? And last thing is really maintain that spirit of humility because venture capital is at a frontier of technology and business in markets.

So that's a really important dynamic to have because, I think you lose track of that. I think that the market salary is passed to you pretty quick after that as well.