With more than 220 active venture capital funds and early-stage investors operating in Australia, investors now face an abundance of choice. This represents dramatic growth from just 34 funds in 2000, but it also means the quality and approach of funds varies dramatically.
The challenge is that most venture funds look similar on paper. They all claim to back exceptional founders, provide value-add support, and generate superior returns. The differences that actually matter are often subtle but crucial for long-term performance.
The fund selection framework
Choosing a fund requires evaluating four critical areas: strategy and focus, fund size, track record and team, and operational approach.
Strategy and focus
Every fund has a mandate – their core investment strategy distilled into a clear statement. Skalata's mandate, for example, focuses on capital-efficient, market-ready, and innovative startups. Others might require science-backed companies, university connections, or specific geographic focus.
Sector-focused funds often develop detailed theses – their belief system about where specific markets are heading and what will generate returns. A deep tech fund might argue that quantum computing will revolutionise drug discovery, while a climate tech fund might focus on carbon capture technologies reaching commercial viability.
These theses can focus on verticals (how will healthcare economics evolve?), business models (how will AI change software pricing models?), or technological shifts (how will autonomous systems reshape logistics?). The best theses are research-driven but avoid being overly prescriptive.
Sector-agnostic funds take a different approach, focusing instead on stage-specific expertise and founder characteristics. Rather than predicting which industries will succeed, they concentrate on identifying exceptional founders and helping them navigate the specific challenges of building companies at their chosen stage.
Both approaches can work, but they require different skills and evaluation criteria. Sector-focused funds need deep domain expertise, while stage-focused funds need broad operational knowledge and strong pattern recognition across industries.
The stage focus also matters significantly for returns. As we explore in our analysis of why seed-stage funds often outperform, early-stage investing offers fundamentally different risk-return profiles than later-stage venture capital.
Fund size
One factor that significantly impacts fund performance is size, though not in the way most investors expect. Fund size affects everything from investment strategy to return potential, with smaller funds outperforming their larger counterparts over the past decade.
The reasons are structural: bigger funds need bigger outcomes to generate meaningful returns, which changes both deal selection and portfolio construction. A $1 billion fund needs portfolio companies to achieve exits north of $500 million, while a $50 million fund can deliver excellent performance with exits in the $20-50 million range.
Track record and team
Past performance doesn't guarantee future returns, but it reveals decision-making patterns, portfolio support effectiveness, and exit execution capability. When evaluating track record, focus on two key metrics: Total Value to Paid-In capital (TVPI) and Distributions to Paid-In capital (DPI).
TVPI shows the fund's paper value including both distributions and unrealised holdings, while DPI measures actual cash returned to investors. A fund with high TVPI but low DPI might have impressive valuations on paper, but hasn't yet proven it can convert those into real returns.
Younger funds naturally show more unrealised value since exits take time, but more established managers should ideally show a track record of converting paper gains into actual distributions over their fund lifecycles.
Equally important is whether the team's experience matches their investment focus. The highest-performing general partners typically have either operational startup experience or deep sector expertise. But the type of experience matters enormously.
A general partner who scaled a company from Series B to IPO brings different skills than someone who has guided dozens of companies through the treacherous seed stage. Early-stage companies need help with fundamentally different challenges: validating product-market fit, building initial sales processes, and navigating the transition from founder-led to scalable operations.
The best seed funds have teams with extensive experience in these specific challenges. They understand the common failure modes of early-stage companies and can provide practical guidance on everything from pricing strategy to early team hiring.
Check how actively involved partners are with portfolio companies. A fund managing 100+ investments across three partners will struggle to provide meaningful support to individual startups.
Operational approach
The best funds don't just pick winners; they help create them. This requires a sophisticated approach to portfolio support that goes well beyond writing cheques.
Look for funds that can articulate their value-add clearly. Do they help with talent recruitment? Customer introductions? Strategic partnerships? Follow-on funding connections? The most effective funds have developed systematic approaches to these challenges.
However, be cautious of "value-add" marketing that doesn't translate to reality. Recent data from Cut Through Venture shows 62% of founders feel their investors don't deliver on promised support.
The due diligence process
Once you've identified promising funds, treat the evaluation like any serious investment decision.
Timing matters
Most funds raise capital every 2-5 years, and the best ones are typically oversubscribed. Express interest early and ask to be notified when the Investment Memorandum (IM) becomes available.
Read the IM thoroughly
The Investment Memorandum contains everything you need to evaluate the fund's strategy, team, and terms. Pay particular attention to fee structures, investment timeline, and exit expectations. Don't hesitate to ask clarifying questions – serious funds expect sophisticated investor inquiries.
Understand the capital call process
You won't transfer your entire commitment on day one. Instead, funds make capital calls as they identify investment opportunities. Typically, 25% is called at first close, with additional tranches called over the fund's investment period.
Evaluate ongoing communication
Quality funds provide quarterly updates covering portfolio performance, new investments, and market insights. These reports should be substantive, not just marketing material.
Institutional validation matters
One often overlooked indicator of fund quality is institutional backing. Universities, government agencies, and established financial institutions conduct extensive due diligence before committing capital. Their involvement signals that the fund has passed rigorous evaluation processes.
Institutional investors bring several advantages beyond capital. They often provide valuable networks, strategic guidance, and credibility within the broader ecosystem. More importantly, their investment decisions are typically based on thorough analysis rather than personal relationships or marketing appeal.
When evaluating funds, look for backing from reputable institutions. While not guaranteeing success, institutional involvement suggests the fund has demonstrated professional standards and investment discipline to sophisticated evaluators.
Red flags to avoid
Some warning signs indicate funds you should avoid entirely.
Funds without clear mandates often lack investment discipline. However, this doesn't mean the mandate needs to be sector-specific. A fund backing “exceptional founders building capital-efficient SaaS companies solving non-obvious problems” can be just as focused—and arguably more resilient—than one targeting “deep tech solutions for regulated industries like healthcare and finance.”
Be suspicious of funds that claim to add value but can't specify how. Genuine value-add requires systems, processes, and dedicated resources – not just good intentions.
Avoid funds where key personnel lack relevant experience or where there's high turnover among senior staff. Venture capital is a relationship business, and continuity matters.
Networks and ecosystem integration
The most effective funds are deeply integrated into startup ecosystems. They attend and host events, maintain relationships with accelerators and universities, and collaborate with other funds.
Strong network effects matter because deal flow often comes through relationships rather than cold outreach. A fund that receives hundreds of applications weekly needs sophisticated filtering processes to avoid missing high-potential opportunities.
Look for funds that have established relationships with later-stage investors. Seed funds that can introduce portfolio companies to Series A investors provide crucial value as startups scale.
The human element
Ultimately, venture capital success depends on people making good decisions under uncertainty. The best funds combine analytical rigour with intuitive understanding of founders and markets.
Pay attention to how fund partners communicate about their investments and the startup ecosystem generally. Do they demonstrate genuine understanding of founder challenges? Do they speak respectfully about unsuccessful investments? Do they practice what they preach regarding diversity and inclusion?
This matters because venture capital investments typically last 7-10 years. You want partners who will remain committed and engaged throughout multiple market cycles.
Making the final decision
Once you've completed your due diligence, the decision often comes down to alignment. Does the fund's strategy match your risk tolerance and return expectations? Do you trust the team to execute effectively? Are you comfortable with the terms and timeline?
Venture capital requires patience and commitment. The best-performing funds often go through challenging periods – promising companies that struggle to reach the next funding round, strategic pivots that don't work out as planned, or exits that take longer than expected. These difficulties are inherent to the asset class, not signs of fund failure.
What matters is how fund managers navigate these challenges. Do they maintain support for portfolio companies during tough times? Do they make rational decisions about follow-on investments? Do they communicate transparently with LPs about both setbacks and progress?
Choose partners you trust to maintain focus on long-term value creation. Taking time to evaluate options thoroughly increases your chances of participating in the asset class's most attractive opportunities.
For Australian investors, it's also worth considering tax-efficient structures like ESVCLPs when evaluating fund options, as these can significantly impact your net returns over the fund's lifecycle.
