Mayfield's Naveen Chaddha rejects the venture trend of chasing logos and "hot" deals, which he compares to buying beachfront real estate. His firm's strategy is to be a disciplined financial investor focused on a single metric: DPI (Distributions to Paid-In Capital), aiming for consistent, top-decile returns rather than succumbing to FOMO.
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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.
A common mistake in venture capital is investing too early based on founder pedigree or gut feel, which is akin to 'shooting in the dark'. A more disciplined private equity approach waits for companies to establish repeatable, business-driven key performance metrics before committing capital, reducing portfolio variance.
Instead of being everything to everyone, Mayfield embraces hyper-specialization. Chaddha compares the firm to In-N-Out Burger: it offers a limited, high-quality menu (early-stage investing) and doesn't chase other "dishes" (late-stage, different sectors), creating a strong brand and consistent demand from founders and LPs.
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.
Despite constant talk of new venture capital models, firms like Index Ventures and Benchmark demonstrate that the traditional approach still reigns. Their success comes from disciplined, competent execution within a chosen strategy, not from reinventing their fundamental approach to investing.
To combat valuation hype, Mayfield defines its investment thesis as a specific 'product.' Just as In-N-Out doesn't sell chicken burgers, Mayfield doesn't do billion-dollar seed rounds. This 'product focus' allows them to stay disciplined and partner only with founders who align with their sustainable model.
The venture capital business requires consistent investment, not sprinting and pausing based on market conditions. A common mistake is for VCs to stop investing during downturns. For companies with 50-100x growth potential, overpaying slightly on entry price is irrelevant, as the key is capturing the outlier returns, not timing the market.
In frothy markets with multi-billion dollar valuations, a key learned behavior from 2021 is for VCs to sell 10-20% of their stake during a large funding round. This provides early liquidity and distributions (DPI) to LPs, who are grateful for the cash back, and de-risks the fund's position.
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.
Mega-funds like a16z operate on a different model than smaller VCs. They provide Limited Partners with diversified, almost guaranteed access to every major tech company, prioritizing strong absolute dollar returns over the high multiples sought from smaller, more concentrated funds.
