A couple weeks ago I attended the annual meeting for HRJ Capital. HRJ stands for Harris (Barton), Ronnie (Lott) and Joe (Montana), the three principals of what was formerly known as Champion Ventures. One of the panels at HRJ's annual meeting was made up of limited partners in their funds. The panel was intended to give HRJ's investors' perspective on the current market and included principals from Cornell's endowment, the Henry J. Kaiser Foundation, GIC and Regis Management.

As part of the conversation, the LP panelists were asked whether they were still looking at potential investment in funds run by "emerging managers" (aka new funds). While they all stated that there was a certain appeal to getting in early with funds that might be successful in the coming decade, they were all equally skeptical that they had sufficient data to judge such emerging managers and pick the ones who would shine in the coming years.

Bob Burlinson, a Stanford classmate of mine and head of Regis Management Company, made an interesting observation. He said that he judged Venture Capital firms by 4 criteria: 1) their ability to attract interesting entrepreneurs; 2) their ability to recruit great teams; 3) their ability to assist with future financing for their portfolio companies; and 4) their ability to deliver beta customers. Given all that, Burlinson concluded that it would be very difficult to find emerging managers who he believed could meet all of those criteria.

While Bob’s criteria are perfectly reasonable ones, I suspect that the very best way to judge the likely success of any venture firm (emerging or otherwise) is to look at its track record. Past success is an excellent indicator of the ability of a firm and its members to pick lucrative deals. That is not only because past success suggests a certain amount of prescience when it comes to picking winning teams and technologies but, perhaps more importantly, because it makes that firm more likely to meet all 4 of Bob’s criteria: 1) VCs who have invested in successful companies in the past attract a larger number of potentially interesting new deals to look at; 2) a track record of success makes it easier for a VC to recruit executives into the next Microsoft (if you’re August), Amazon (if you’re Kleiner), Yahoo! (if you’re Sequoia), etc. ; 3) just as VCs like to bet on entrepreneurs with a history of success, later stage investors like to follow venture funds with a history of success, making future financings less difficult; and 4) successful VCs tend to have deeper relationships that make it possible to line up relevant beta customers (perhaps those successful companies in which that VC has invested in the past).

I do not mean to suggest for a second that a firm with a storied past will always outperform a new fund. History has shown that great firms can have underperforming funds and emerging managers can deliver spectacularly. After all, all firms and investors with a great history were at one time or another emerging managers. Placing money early with an emerging manager who can meet the above criteria may result in dozens of highly profitable years for an investor. But putting money with a firm that has consistently outperformed its peers over a long period of time will assuredly be the best bet to make — assuming you are able to make it.