In a few months, we are likely to see the annual Forbes Midas list of top performing early stage VC investors. There is always some debate about the methodology and accuracy of the list, but I think it’s a pretty interesting data set that reflects some of the things that have been happening in tech and VC over time.
Given that it’s a new decade, I thought I’d do a lookback and compare the list today to the one 10-years ago to try to tease out the changes that have transpired in the VC industry over this time. Interestingly, it looks like the Midas List skipped 2010 and changed methodologies considerably in 2011, so you’d need to wait until 2021 to do a true look back. Since I’m mainly doing this for my own interest and this isn’t supposed to be a scientific analysis, I’m going to instead look at the 2019 list and compare it to the 2009 list.
First, let’s set the stage for this time period. 2009 was the nadir of the global economic crisis, followed up an unprecedented bull market. The S&P500 was in the 700’s. The iPhone 3GS was launched in 2009 with a whopping 600 MHz processor, 256 MB of RAM, 3 MP camera and a price of $299 for the larger 32GB version. Netflix had 10M subscribers, but more than half primarily utilized the DVD by mail service. Instagram and Snapchat hadn’t been invented yet. Every company was about to be a big data company, but not an AI or Machine Learning company. It had been more than 10 years since Deep Blue beat Gary Kasparov, but it would be another 6 years before Alpha Go beat Lee Sedol.
So, what has transpired in the last 10 years in the VC world? A couple interesting things.
The Rise of Seed Focused Funds
Back in 2009, almost no seed funds were represented in the Midas List. Even Ron Conway’s investing was under the moniker “Angel”, not as the firm SV Angel. Since then, about 10% of the list is represented by investors at seed focused funds. This number is probably low vs the reality of actual performance. One of the weaknesses of the Midas list methodology (so I’ve heard) is that it under-emphasizes the impact of one’s cost basis and ownership relative to fund size. So seed investors that got into a great company at 1/10th the price of a series A investor does not get 10X the credit. Also, a $500M exit that returns a seed fund does not get counted as much as a $1B exit that may only return 20% of a large fund.
I think incorporating more of a measure of price of entry as well as ownership relative to fund size would boost the representation of seed funds even more. This was definitely one of the major trends over the last 10 years. What will be interesting to see is whether this persists. When you look at the websites of the seed VC’s on the 2019 list, you notice that some are starting to steer away from positioning themselves as Seed funds as they accumulate more capital and are starting to enter companies at later stages. It will be interesting to see if this trend continues.
Slowly Improving Demographic Diversity
It was interesting to compare the demographics of the 2009 list vs. the 2019 list. In 2009, white males made up about 70% of the list vs. 56% in 2019. The percent of female investors on the list remains shockingly small, but the numbers did increase from 5% in 2009 to 12% in 2019.
To try to put this in some context, I perused the list of Fortune 500 CEOs as a point of comparison. The Midas list’s female representation compares relatively favorably to the percent of female CEOs leading Fortune 500 companies (12% vs 6%). 32% of the 2019 Midas list is made up of non-white males, which also slightly higher than the list of Fortune 500 CEOs. I’m quite optimistic about the direction that this is headed based on the momentum of more diverse hiring in the junior and mid-level ranks of the industry. But I think it’s important not to take the positive trend here as a given. In fact, if you look at the list of Fortune 500 CEOs over time, it presents a bit of a cautionary tale. Although the level of diversity among this cohort of CEOs was improving slowly for quite some time, it has since flatlined or even moved in the opposite direction in recent years. For me, this is a reminder that it will take years of persistent effort to bend the curve in the right direction on this dimension within our industry.
Innovation is Becoming More Broadly Distributed
Not surprisingly, we’ve seen a broader set of geographies represented by the Midas list over the last 10 years. The SF-Bay Area continues to dominate the rankings, with 56% of investors based in that area. But this is down considerably from 2009 when 70% the list was based in the Bay Area. The biggest rise, unsurprisingly, was China, which enjoyed a huge surge in venture capital dollars over the past decade and enjoyed its fair share of blockbuster exits. To a lesser degree, markets like New York are demonstrating more promise in recent years and I expect that to continue. I also think we’ll see some new geographies begin to gain momentum, especially LA, and perhaps several others. I think we’ll also see more blockbuster returns driven by companies like Chewy or Shopify that are based outside of core tech hubs, even if the investors are themselves based in SF, NY, or Boston
Getting on the Forbes Midas list is a nice milestone for an individual investor. At a firm level, I think that getting multiple partners on the list is a great milestone as well. In 2009 Bessemer had the most Midas List partners with 6 investors. Name brand firms like Benchmark, Sequoia, and NEA had 4+ partners on the list. The number of firms with multiple midas list partners was 16.
In 2019, 20 firms had 2 or more midas list partners, with Sequoia leading the way with a monstrous 10 partners. I think part of the reason for this large number of Sequoia partners is due to the increase in team size as the firm has expanded significantly across geography and stage. But this does seem to suggest that the Sequoia institution does have some sort of secret sauce allowing it to sustain success over time across generations of investors and across different strategies. I find this super impressive.
Another interesting observation is that of the 16 multi-midas list firms in 2009, only 6 still have multiple partners on the list in 2019. It’s a fairly obvious group: Sequoia, Benchmark, Bessemer, GGV, IVP and NEA. Most of the remainder are funds that are less than 20 years old, such as General Catalyst, Lightspeed, Founders Fund, and A16Z. 20 years may seem like a long time, but remember that the Midas list dataset is somewhat backward looking. Most of the companies that drive a particular investor’s performance were probably investments that were made 5-10 years ago. So even if a firm like Founders Fund is 15 years old, the investments that drove their midas list partners’ performance may have been made when the firm was still very new.
I personally think it’s pretty healthy to see so much success in Venture Capital driven by relatively new market entrants. I’m sure groups like Cambridge Associates publishes much more detailed analysis of the persistence of returns over time, but this movement in the Midas List suggests that it’s very rare for a firm to maintain its leadership position beyond 10-15 years. The firms that have done this are clearly doing something right. But the fact that new upstart funds are able to overcome the barriers of entry in the industry and see significant success is a good thing for the ongoing evolution of the industry.
I think the trends described above probably paint a pretty accurate picture of where venture capital is likely headed over the next several years. I think we’ll see more seed managers on the list going forward, with quite a few more seed funds joining First Round Capital among the firms with multiple Midas List GPs. I think we’ll also see continued diversity from a geographic and demographic standpoint. Perhaps similar to the rise of successful China focused investors, we’ll see a similar wave of Midas list investors that have focused specifically on Africa or some other emerging economy. And I think we’ll continue to see a relatively small number of firms show persistent, broad excellence over time.
I also think it’s likely that we’ll see a new niche or strategy emerge, much like how seed VCs emerged in the last decade. What that will look like (and whether the Midas list methodology will identify them) remains to be seen. Perhaps it will look something like what Bryce Roberts is building at Indie.vc, or perhaps strategies centered on cryptocurrencies. But I have to imagine there will be at least some representation from novel investing strategies represented on the list.
Finally, I’m curious to see how the creators of the Midas List will account for the rise of opportunity funds and SPVs. These additional vehicles will make the accounting of true individual investment performance even more difficult. And assuming that is an accurate way to account for them, it will be interesting to look back in ten years and see how they correlate with individual or firm performance.