Let’s start with definitions. When I’m use the term “a VC firm” I’m talking about firms that have 6-10 partners, invest out of >$300m funds and usually have >$1b under management, and invest primarily in A and B rounds.
When you’re raising you’re going to be targeting a number of VC firms, so it’s important to understand how to rank them on quality, as well as how to differentiate types of entities.
VC fund hierarchy is an interesting thing. Some notes:
VCs have established a generally recognized hierarchy. VCs tend to be pretty status oriented and competitive people.1 As such have established a remarkably resilient, fairly stable, and generally acknowledged status hierarchy.
Later-stage VCs, execs, and many savvy/ambitious startup employees all know this hierarchy. They will see it as a plus if you raise from higher quality firms and a negative if you don’t.
The best VCs are headquartered in Silicon Valley --- at least their funds are headquartered in Silicon Valley, though they may be elsewhere.
VC firm tiers
Top tier: the top five firms
This is A16Z, Sequoia, Benchmark, Greylock, and Accel. These are the commonly accepted top VC funds. This list has been stable for the last twenty years; though Kleiner Perkins used to be in this list and a16z is new.
Second tier: the next 50 firms.
There’s a bit more churn here, so it’s probably good to give a general lay of the land here:
Traditional Silicon Valley VC. Generally these have been around since the 70s or 80s and have offices on Sand Hill Road. These are firms like Kleiner Perkins, Mayfield, battery, index, CRV, Bessemer, August, Trinity, NEA, Lightspeed, Matrix, Redpoint, General Catalyst.
Traditional non-Silicon Valley VCs. There are a couple New York ones (Greycroft, Lerner Hippeau) a couple Seattle ones (Madrona, Maveron), a handful in the rest of the US, Europe, and the rest of the non-Chinese world (Point72, Tiger, DST),
Newer VCs. Firms like Khosla, Founders Fund, 8VC, Initialized, OpenView, and so on. Typically these tend to be associated with one person’s brand--- Vinod Khosla for Khosla Ventures, Peter Thiel for Founder’s Fund, and so on. Lots of seed funds also fall in here.
Third tier: those without big exits
Typically the thing differentiating the third tier from the second tier is that the second tier have had a $5B+ exit in recent memory, and the third tier never have. Note that some newer firms are in the second tier even when they haven’t had an exit yet when they clearly will soon.
There are a number of other Silicon Valley based firms that don’t fall into the second tier.
- Good local firms. Good is really a relative word here. You have to understand that being the best firm in Austin or Salt Lake City it’s sort of like being the best basketball player in the European leagues, the best soccer player in the MLS, or the best football player in the CFL. All the good basketball players go to the NBA, and all the good soccer players go to Europe. Because that’s where the real competition, and the money is. Sure, once in a while you get a Doug Flutie. But don’t count on it.
There are some downright predatory firms in a lot of places --- pay-to-play folks who charge you money to pitch them. Avoid at all costs.
Other types of firms
Seed funds. Seed funds are a relatively new (~2009) type of capital. They typically have 2-3 partners at most and invest very early. These are typically more entrepreneurial types than the VCs --- they usually started the firm they represent. There are a lot of seed funds; they typically raise <$100 million per fund so have <$300M under management. They haven’t been around long enough for a clear status hierarchy to emerge, though there are early indications (hint: this is often related to the number of followers they have on Twitter). Seed funds can also be quite focused --- only focusing on developer tools, or social networks, or the gig economy, data, deep tech, etc.
PE / hedge funds / later stage. There are folks like Coatue, EQT, Bain Capital that are hedge funds or private equity with a VC arm. Sometimes they invest at seed too. It’s hard to generalize about these folks, because they all have different models.
1 Traditionally — though this is changing somewhat — becoming a VC partner was somewhat similar to becoming partner in a big law firm. You join as an associate, and wage a brutally competitive battle through your 20s with 80-plus hour work weeks to “make it”. Most don’t. But if you do, you’ll buy a house in Woodside, Atherton, or Pacific Heights and be comfortable for the rest of your life.