Wednesday, December 29, 2010
Hard to Evaluate Performance, Making it Hard to Establish a Reputation
Performance evaluation, at a partner and firm level, is really hard to do in this industry, short of just waiting for funds to return. There’s no objective way of judging performance until the full fund has returned because a single investment could turn a fund from a loser to a huge winner, and because just putting money to work doesn’t mean you’re doing it well. As a result, trying to establish a reputation as a new firm is tough, and figuring out where to put your money as an LP is equally hard.
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Agree on the situation diagnosis (lag is very significant in the industry) but disagree on the reputational impact. I think what really happens is that you're judged on the investments you make. While everyone agrees that putting money to work doesn't mean you're doing it right, I think you'd be hard pressed to find a VC firm that doesn't evaluate its people based on the investments (quantity and perceived quality) that they've made, way in advance of any returns. Same goes for building your reputation. You're evaluated on the deals you've done, whether they've returned or not. The implication here is that your reputation can change quickly if you were, say, an investor in Digg, and watch your baby (and reputation as an investor) go from stellar to.... not so stellar.
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