We hear a lot about funds scrutinizing startups. But there are many instances in which funds get evaluated too.

Founders, you should do your own homework and make sure your fund is a good match. Ditto if you’re a prospective limited partner (LP). Experienced angel investors or angel syndicate leaders launching your own funds, you’ll need to know how to standout in the market.

As a VC, we often get approached by other funds to partner up, and have to make a smart evaluation. Our focus revolves around aspects like sourcing, winning deals, helping companies post-investment, and exit strategies.

Here's a deeper dive into how we approach this evaluation—and how funds can stand out in the right ways.

Understanding unique strategies

When considering a fund, we first aim to understand what sets their strategy apart. The key is to identify the dimension they believe they can dominate.

Is it their sourcing capabilities, their knack for winning deals, or perhaps their post-investment support to companies? One area that's notoriously difficult to measure is the ability to help companies after the investment.

Our diligence questions often revolve around how a fund thinks about its unique edge. For instance, some funds might excel because they have a subject matter expert who attracts deal flow through their expertise. Others might run premier conferences or communities that are prolific in starting companies.

This aspect of their strategy needs to be clear and distinct. Simply having a great network is necessary but not sufficient; what makes a fund special is crucial to understand.

The elevator pitch to founders

Another critical component is the fund’s pitch to founders. In a capital-rich environment, why do founders choose to work with a specific fund?

This goes beyond the initial appeal and delves into the actual value provided, which we assess through diligence calls to founders in the portfolio. These calls help us understand where startups found value from the partners they worked with.

Team dynamics within the fund‍‍‍

Team dynamics also play a vital role. How did the General Partners (GPs) decide to work together, and how do they complement each other? This is essential because we believe that the quality of decision-making improves with diverse, cooperative teams. Understanding these dynamics gives us insight into the potential effectiveness of their collaboration.

Economics and incentives

Economics and incentives within the fund are another major consideration. Show me the incentives, and I'll show you the outcome.

We prefer funds with fair and equitable economics, ensuring junior staff have incentives to grow into larger roles. This is crucial for succession planning and maintaining a robust team dynamic over time. Solo GP funds are harder for us to back unless they are very small. Even then, we look for plans to expand the team.

Future plans and portfolio construction

We also scrutinize the fund’s future plans. Especially among those who transitioned from angels or syndicate leaders to fund managers, it's important to understand their vision for building an institution. They need to demonstrate a plan for growth that spans multiple fund cycles, reflecting a commitment to long-term success.

In terms of portfolio construction, the size of the fund dictates its strategy. The check size, entry valuation, and follow-on investments all impact potential returns. We explore these aspects in detail with the GP to understand how they align with their overall strategy.

Valuation and diligence process

Valuation strategies are critical. Does the fund have a strict valuation bar? When and how do they flex it? These questions help us gauge their approach to maintaining discipline while being flexible enough to seize opportunities.

Understanding their diligence process is also key. The more funds we evaluate, the better we can benchmark one against another. This process varies significantly across stages—what works for a pre-seed fund might not be suitable for a Series A fund.

Competitive edge and value addition

When it comes to competitive deals, we ask the fund to provide examples. How did they get in, gain conviction, and secure the allocation? This insight into their competitive edge helps us understand their unique approach to winning deals.

Many VCs claim to add value, but the reality is often different. We focus on understanding their thought process for adding value. What specific superpowers do they bring? How do they prioritize their time to deliver meaningful support to their portfolio companies? This goes beyond marketing claims to reveal genuine value.

Direct investing and exit strategies

LPs often show interest in direct investing in later-stage companies. Understanding whether a fund offers Special Purpose Vehicles (SPVs) for LPs, and the associated fees or carry, impacts our overall private portfolio strategy.

Exit strategies are another critical aspect. When and how does the fund decide to take money off the table? This varies widely and reflects the GP’s strategic thinking and risk management approach.

Anti-portfolio and learning from mistakes

The anti-portfolio question is always intriguing. Can the GP honestly discuss missed opportunities? This reflects their ability to learn from mistakes and evolve their investment thesis. Such introspection is invaluable for understanding how a GP’s approach might change over time.

Chemistry and trust

Finally, there's an element of chemistry and trust. Do we believe this fund will act in the best interests of its LPs, especially in difficult situations? This intangible quality often emerges from multiple interactions and is critical to our final decision.

Creating and evaluating a standout fund is a nuanced process involving a blend of tangible metrics and intangible qualities. Each interaction helps us build a comprehensive picture of the fund’s potential, ultimately guiding our investment decisions.

Good luck!

Shiyan

This article was written by Hustle Fund Managing Partner Shiyan Koh, based in Singapore. In her spare time she plays Padel, continuously thwarts her children’s efforts to get more screen time, and hunts for the best bak chor mee. 🍜