It is important to consider a VC's available capital when deciding whether to contact them. Most VCs advertise their assets under management (“AUM”) on their website. However, it is worthwhile to note that while AUM is a decent indicator of capital that will be available to your firm, it is not the best metric. There are a few reasons for this. First, the AUM metric includes assets that have already been invested. A VC who just finished investing a fund (and has not yet raised another) may not have any available capital to invest despite having a large AUM number listed on their website.

While in general VCs with more capital under management are more likely to be able to support your company through subsequent rounds of funding, the three metrics that you should pay attention to are:

1. the amount of un-invested capital,
2. the capital reserves for each portfolio company and
3. the AUM per investment professional.

The Amount Of Un-invested Capital
Generally, VCs that have a significant amount of un-invested are going to feel more comfortable putting more capital into your company now and in the future. There are certainly a number of exceptions to this rule, but this metric can serve as reasonable high-level guidance on how easy it will be for the VC to continue to support your company in the future.

Capital Reserves
The second consideration is the target amount of capital deployed to each company. The amount of capital saved for future rounds of investment in a portfolio company is called a ‘capital reserve’.

Generally VCs with larger funds deploy more capital to each investment, over the lifetime of the company. However, this is not always the case; some larger funds seek to invest in more companies, keeping invested dollars per company down. As a result, you need to ask each firm what type of reserves they keep (if they don’t explicitly state it on their website).

AUM Per Investment Professional
The other factor to consider is the business needs of funds that have a large ratio of AUM to investment professionals, as these funds may have incentives to act in a manner that is sub-optimal for the entrepreneur. Since most VCs only have the time to make a relatively fixed number of good investments, when this ratio is higher VCs need to invest more capital in each company.

This can create two challenges for entrepreneurs. First, many VCs with a high ratio of AUM to investment professionals try to avoid syndicating investments, as they want to provide all of the capital for each round. While this means that the entrepreneur doesn’t have to spend time pitching to syndicate VCs, it does mean that entrepreneurs will not realize the benefit of having another VC invested in the company. Having more VCs involved usually means access to more knowledge, contacts and experience. More VCs also means a greater chance of receiving additional investment when (and it usually happens) the company encounters an obstacle that requires more cash than it has in its coffers to overcome.

The second concern with funds that have a high ratio of AUM to investment professionals is that they may try to force capital on entrepreneurs when the company does not need the money. These VCs have a strong incentive to invest more capital and this incentive may not always align with the best interest of the company.

Ideally, you should evaluate VCs on these metrics. If in the end you have the choice of several investment partners, this information can prove to be very useful.

Comments

[Abhishek Goyal]

Well, I am not sure if VCs publicly announce "The Amount of Un-Invested Capital" publically.

[Mark Davis]

Abhishek,

This is a great point. However, most of the time entrepreneurs can get a gauge of this by asking around a bit. Some legwork is required, but it's likely to be worthwhile.

--Mark

[Vijay Goel, M.D.]

Mark, some great points. I'm wondering if you might want to add one more, around timing.

The metric should be:
Horizon (3-5 years),
is sometimes adjusted to fund horizon (this matters when a fund may start getting long in the tooth and will want shorter timeframes on returns ),
and may on occasion be based on investor horizon (e.g., the investor has certain needs to get recognized for investments to make a promotion, prior to making a career move, etc)

Would you agree?

[Mark Davis]

Vijay,

I think the age of the fund can be a consideration. I intend to post on that topic in the future. Great comment.

As for the investor horizon, it is a factor, but in my opinion a small one. Typically, in any decision making model other than the Federacy (see my post on how VCs Make Decisions Internally) there are numerous other partners that need to approve an investment. And, in a Federacy partners are most often already well positioned in their careers and not in need of hasty investments. As a result, cruddy investments are not forced through, making this aspect less of a consideration.