A simple framework to evaluate a VC's skill is the four 'D's'. They need proprietary Deal Flow, the ability to make good Decisions (initial investment), the conviction to Double Down on winners, and the discipline to generate Distributions (returns) for LPs.
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Venture capitalists thrive by adopting one of two distinct personas: the "in the flow" consensus-driver focused on speed and connections, or the "out of the flow" contrarian focused on deep, isolated work. Attempting to straddle both paths leads to failure.
The most successful venture investors share two key traits: they originate investments from a first-principles or contrarian standpoint, and they possess the conviction to concentrate significant capital into their winning portfolio companies as they emerge.
Underperforming VC firms persist because the 7-10+ year feedback loop for returns allows them to raise multiple funds before performance is clear. Additionally, most LPs struggle to distinguish between a manager's true investment skill and market-driven luck.
Effective due diligence isn't a checklist, but the collection of many small data points—revenue, team retention, customer love, CVC interest. A strong investment is a "beam" where all points align positively. Any misalignment creates doubt and likely signals a "no," adhering to the "if it's not a hell yes, it's a no" rule.
Successful concentration isn't just about doubling down on winners. It's equally about avoiding the dispersion of capital and attention. This means resisting the industry bias to automatically do a pro-rata investment in a company just because another VC offered a higher valuation.
Resist the common trend of chasing popular deals. Instead, invest years in deeply understanding a specific, narrow sector. This specialized expertise allows you to make smarter investment decisions, add unique value to companies, and potentially secure better deal pricing when opportunities eventually arise.
'Gifted TVPI' comes from consensus deals with pedigreed founders who easily raise follow-on capital. 'Earned TVPI' comes from non-consensus founders whose strong metrics eventually prove out the investment. A healthy early-stage portfolio requires a deliberate balance of both.
Strict investment theses (e.g., "only second-time founders") are merely guidelines. The high volume of meetings required in venture capital provides the essential context and pattern recognition needed to identify exceptional outliers that defy rigid heuristics.
LPs have a binary focus: cash-on-cash returns. As long as a VC fund is consistently distributing multiples back to them (high DPI), they are less likely to question the fund's strategy. This "what have you done for me lately" attitude is key to securing re-investment in future funds.
Most VCs "gather" by networking broadly. QED advocates for "hunting": identifying a single, high-conviction company and relentlessly pursuing an investment. This shifts the mindset from passively waiting for inbound leads to proactively targeting the absolute best opportunities long before a formal fundraise begins.
