Chris Farmer of General Catalyst borrowed a page from the Google book to create InvestRank, a system for ranking venture capital firms.
The system looks at the venture who led the first rounds in highly successful companies and assigns them a rank based on how many other firms followed them in a syndicate during the subsequent rounds. So in place of looking at inbound links, Investrank looks at inbound investments.
As Fred Wilson wrote this morning, “The objective of early stage VC investors is to get into the best deals in the first round and then to get other high quality firms to follow on in the next rounds. That is how it was taught to me and it is how we have built the two firms I have co-founded.”
The results of this kind of network effect should be a warning to LPs. Farmer found that while 13 percent of VC firms created 44 percent of the value during the PC boom, things were much more concentrated during the dot-com era, when just four percent of the firms investing captured 66 percent of the IPO value.
As Wilson wrote today, “Returns are important, but they are a trailing indicator. There is no guaranty that past returns will be an indicator of future returns. What is more important is the team, the strategy, and their ability to get into the right deals and build the right syndicates. InvestorRank is a good attempt to quantify that last bit.