Here’s a highly informative and irreverent post on how venture capitalists make money. If you are at all interested in the industry, I recommend it. I had to piece it together from many books and blogs over the years. This is maybe the best individual post on the topic I’ve seen.
In the post, the author shares this graphic that they call “The Top Quartile VC Loop.”
Get allocations in good startups
Generate top quartile returns for your LPs
Gain notoriety for your golden touch
Your track record attracts the best startups
The famous funds in VC are famous because they did this. They outperformed and that outperformance led to more outperformance. Once you’re in the loop, it seems almost hard not to keep winning—unless you blow yourself up.
This loop is what every general partner is trying to either kickstart of maintain for their fund. It’s useful framing for everybody in the VC ecosystem:
Aspiring and junior VCs can ask themselves how they can aid the general partners in each stage of this loop
Founders seeking capital must position their company as a way for the fund to achieve top quartile returns for their LPs
GPs are trying to get their loops going and LPs want to invest in funds with this loop
Several friends have recently asked for advice on breaking into VC and my response has been “get as close to doing the job as you can.” Good is domain expertise (e.g. prior experience in the field or thought leadership) and clear articulation of why you would have good judgement. Better is proven access (by e.g. introducing funds to companies) and approximation of judgement (by e.g. managing a “fantasy portfolio.”). Best is actually having invested and built up a track record.
This loop offers some context on why. To break into VC, you need to convince partners or LPs that you can help start or accelerate this loop.