Key Takeaways

  • Venture capital isn't an 'asset class,' it's an 'access class.' Your ability to get into top deals matters more than just having capital ready to deploy.
  • Top-quartile VC funds show persistent returns. Professor Steve Kaplan's study found this persistence is stronger than any other asset class in history.
  • Most funds are not top quartile. David Weisburd defines a second-quartile fund simply as one that isn't among "these 15 firms" consistently in the top tier.
  • True conviction means more than just a few follow-on checks. Antonio Gracias invested 30 times into SpaceX, shattering the common idea that 3-4 investments show conviction.
  • To get into the right deals and limit bad outcomes, use Weisburd's Three Principles for Limiting Venture Co-Investment Adverse Selection.

The Weisburd's Three Principles for Limiting Venture Co-Investment Adverse Selection

  • Principle 1: Partner with High-Conviction Emerging Managers: We only partner with emerging managers that have very high conviction in their existing portfolio. In other words, where we've applied the Peter Dugen Miller invest investigate. We're leveraging the relationships and the insider information of cap table members in order to access their best assets.
  • Principle 2: Invest with Top Quartile Funds at First Investment: We only invest when top quartile fund is investing for the first time. This is really critical and there's a trade-off there. We miss opportunities where they might be investing for a second time. Sometimes those are great opportunities. Famously, Sequoia backed WhatsApp in every single round made phenomenal returns.
  • Principle 3: Diligence the Company Itself: Of course were diligencing the company themselves. But most of these opportunities, although you can never predict which opportunities are going to be the next SpaceX, the next OpenAI, the next Anthropic, if you have the right portfolio construction, you could design a portfolio in such a way that you are capturing those winners.

When This Works (and When It Doesn't)

Weisburd says these principles are for limiting adverse selection, which he calls “the most important question in venture capital.” This framework shines when you're a sophisticated limited partner or a high-net-worth individual looking to co-invest alongside established players. It's built for those seeking exposure to deals that have already passed some initial muster from a trusted source, or where the "smart money" is actively participating. It helps you pick winners by piggybacking on the diligence and access of others.

However, this method might limit opportunities if you're an early-stage angel trying to get into pre-seed or seed rounds before any top-tier VC has made their first move. The "invest with top quartile fund at first investment" rule also means you'll miss out on potentially massive returns from later, growth-stage investments where a top fund is doing a follow-on, like Sequoia's multiple rounds in WhatsApp. It's a risk-mitigation strategy, not an early-stage deal-sourcing strategy.