Vanity Metrics in Venture Capital

Venture Capital is a craft. Despite of the scientific, academic, and economic models that form the fundamental grounds of the venture capital industry, there are everchanging variables that make it hard to define the exact business model of a successful VC. After all, you can model the past performance of a portfolio and understand it, but you can’t even predict the future of a single investment with precision. In other words, investors can’t prove in advance how they’ll leverage high-growth companies to multiply other people’s money… hence, past numbers are all VCs have on their defense.

Speaking about numbers, a lot has been said about the vanity metrics used by entrepreneurs to impress investors: facebook followers, registered user base, number of Fortune500 clients, you name it. VCs repeatedly remind those founders that it’s not about how much you have, but how much you deliver. So they discuss user engagement, churn, lifetime value, and montlhy recurring revenue growth to make things clearer, paving the way for a potential investment negotiation.

Fine. But have you ever thought about VCs and their own vanity metrics? What numbers do VCs use to impress founders and their own limited partners, in a way they feel confident and seem attractive to people, companies, and organizations that hold a considerable amount of money to be multiplied? Let’s look into three of those.

Capital under management

First thing most big funds use is capital under management. Fair enough: billions of dollars are a pedigree certificate, and it usually takes a long time to build an asset that big. But that’s just deployable money, right? And not performance guarantee. Yes, the fund has a track-record and has been able to harvest that amount of bling – but the taller you are, the harder your potential fall by bleeding money on a bad investment. They compensate that risk by following other funds on big rounds in already established companies, or aiming for thinner air and creating a private equity operation.

Return on managed capital is a much better metric than capital under management. When considering a fund, potential limited partners usually know the gain of each managed fund…So wouldn’t it be great for founders to have access to the same metric, and what’s the story behind it? So when analyzing funds, aim for leveraging and returns, not how much money they hold.

Number of big portfolio companies

Imagine the thrill a founder feels when clicking “Portfolio” in a fund’s website and seeing companies like Dropbox, AirBnB and Uber on that list… This is how big funds hook entrepreneurs. Even so, there is a considerable chance that fund followed another fund on that investment. In other words, it didn’t find that startup by itself. But isn’t this how a fund differentiates in the VC market? By finding all the great companies long before they’re discovered by others?

Instead, find the big companies where the fund has been an early investor. Since big funds will often concentrate their bets on billion-dollar companies, the foreseeing powers of a fund will often translate on the companies it found way before everyone else. It’s even better when they’re a big fund, but bent their rules to invest small bucks on a promising startup.

Return multiples

You’ve probably heard this somewhere: “Our most recent exit was a 10x return” – meaning the return was 10 times the capital initially invested. Consider an investor holds 30% of the startup’s equity:

  • If the fund invested $2M, the startup exited in a valuation of ~$60M
  • If it invested $10M, the startup exited in a valuation of ~$300M

Thus, the multiple helps if you know the amount of capital originally invested and when did the fund invest. If you don’t know round details, the return multiple is just a vanity metric. A tenfold increase in valuation takes considerable time for most startups: was 10x a great investment? Maybe, if it didn’t take 10 years or longer.

A 50x on the best investment made by a fund compensates for all the losses on all other portfolio startups. So if you’re really evaluating how the fund performs, the wins and losses could be on the table for a better analysis; the list of returns on single investments is a better metric than single return multiples, because it’s like a drill-down in the first metric: it brings all the 10x and 20x down to 0x sometimes, because a fund is not all about hits.

You’re so vain

You probably think this post is about you – well, not necessarily. But if a VC is looking into better investments and less waste, metrics should be a heavy duty.

The average founder is not always in a picky position to choose a fund – they mostly need the money, wherever it comes from. Smart founders, on the other hand, envision their subsequent rounds and think: what are US$ 5 billion worth if all we need is a US$ 5 million round? Then the questions become:

  • will they bring other funds to the table, diversifying networking and reaching other markets?
  • how did the other invested founders leverage the fund in their own benefit?
  • how does the fund relate to its invested founders over time?
  • how hands-on are these guys?

And many others related to quality, not quantity.

The vast majority of returns, even for big funds, lies in the basis of the pyramid: early-stage startups. When investing early in (still) small but promising startups, funds can dramatically improve their performance in a course of 5-7 years. If they look deep into themselves and consider the numbers that really matter (instead of self-deceiving themselves with vanity metrics), there is an incredible opportunity for improvement.

The MENTOR Framework: Six Things To Improve your Feedback Sessions

I’ve founded two startups and co-founded another, exited my last one, invested on a handful, and founded an accelerator. That added considerable experience to shape myself into a better mentor, and I’ve been paying it forward for some time now:

  • I have been asked personal feedback on thousands of businesses, some repeatedly, usually on closed sessions or calls. Each took from 30 minutes to extensive 4-hour face-to-face discussions.
  • I’ve written 10,000+ emails with fact-based feedback on pitches, ideas, business models, or simply recommending useful literature on specific topics the founders needed to improve
  • I’ve worked closely (weekly meetings mostly) with dozens of startups and helped them grow, some reaching 8-figures revenue on less than five years

Those would be just numbers if I weren’t a conscious perfectionist. As a consequence, I’m insanely cautious about two things: a) achieving the best outcome I can, as every perfectionist desires, and b) doing more with less to quickly reach the intended results, thus reducing my exposure as a shameful perfectionist. To be more effective and efficient, I spend considerable time trying to find my work patterns and molding those into frameworks – always increasing reuse and reducing waste.

So I recently blueprinted a mentoring framework I’ve been using for years, and it occurred to me: the best way to improve it is to share it.


The framework uses six key concepts to be kept in mind before, during, and after feedback sessions, and together they form the acronym MENTOR:

  • the Mechanics of the business
  • the Empowerment of the founders
  • the Network a mentor can bring
  • the Trust that good teamwork can create
  • the Objectiveness of key arguments
  • the Results and mutual benefits

Let’s dive deeper into each one of them, and hope you memorize their meanings by the end of this post.


The M stands for Mechanics, so we can understand the engine that moves the company. The goal is to discuss refinements, validations, and improvements in the business model that may lead to a more scalable business.

I usually start with a business model canvas in my head, but the plot thickens depending on the startup’s stage. Here are the M questions to answer over time:

  • Are we satisfied with the present problem/solution fit? Is there room to improve?
  • What is the nearest business model we can validate to get initial revenue?
  • How can we improve the scalability of the business model?
  • What are the key drivers or metrics that must be tracked?
  • What are the riskiest assumptions we can validate first, for every model hypothesis we have?
  • How does all that propagate to the team, plan and operations?

Mentors who think out of the box often are the ones who suggest innovative and profitable business models. So mind the M.


The eagle teaches the eaglets to fly by staying close and letting them dive by themselves. Keep this metaphor in mind, because the E stands for Empowerment.

This is critical for early-stage startups: we must help the team find the answers, and not impose the answers we already have. The founders must feel confident they’re improving and learning together with the mentor – so they’ll solve the hard things by themselves.

Here’s what you must consider to empower the founders:

  • Am I imposing directions? I should not.
  • Did they get to the answer by themselves? If not, how can I run around the issue and help them figure it out?
  • Are they right and I’m wrong? Maybe I’m wrong!
  • How can I reach a middle ground that I’m confident will work?
  • What task or references can I list to help the founders decide on this?
  • Remember motivation works well to reinforce good behavior: “Nice!” or “You got it!” should come out naturally when the founders solve stuff out.

Is the mentor pushing too hard? The founders can drive the discussion towards those points and help the mentor realize opinions are too biased.


This may seem obvious to most mentors, but not many exercise the N (Network) the way they should. The expression “Expand your network” needs no further explanation, so here are the key reminders:

  • What founders do I know who have been through the same problem?
  • What investors do I know who can help them out without being judgemental?
  • What contacts do I have in their Customer Segments who can try the product, or help validate it?
  • Can I help them sell this as it is, right now? Who should I pitch?
  • If I’m not able to help them on this, do I know anyone who can?

Founders should always remember the networking factor on a mentoring session. Ask for contact info right away, not later.


There’s no I in MENTOR. The T stands for Trust to constantly remind us that mentor and founders must form a cohesive and dependable team, each one resembling the rock climber fixing the rope right above you.

There’s also an intrinsic ethics present in every feedback session: confidential operations details will be verbalized by the founders, and personal stories will be disclosed by the mentor. Hence, some conducts must be observed:

  • Ethics is massively important on mentoring
  • The mentor should not impose his experience nor act as an omniscient deity (mentors learn as well!)
  • The mentor should not impose respect, and should avoid comparisons between how mentor and founders performed
  • Mentors and founders must compromise to deadlines and pending tasks
  • Mentors and founders must be able to simply have fun, even while discussing the heaviest topics

In my experience, when founders and mentors build a bond that allows for straight-up teamwork and trust, feedback sessions and the overall relationship play a key role in the evolution of the business.


Remind everyone in the room to be Objective: when someone says “I think” or “I like it better” in a feedback session, a fire alarm should go off. That speech balloon should be instantly replaced with “Warning – I’m stating an opinion that may in NO way relate to the inexorable truth. That said, [ insert the original remark ]”.

That doesn’t mean people can’t issue opinions, but instead prevents subjective decisions to influence the startup in a harmful way. Here are the tips:

  • Look up numbers and facts that corroborate your opinions
  • Define the metrics that will validate which path to follow
  • Propose assumptions that invalidate the present conclusions (they are mostly intuitive ones, and those should be minimized whenever possible)
  • UX is only validated by users, not anyone’s (much less a mentor’s) design skills
  • Shut up and listen. Rethink what you’re about to say, and rephrase it in a non-subjective way

So be objective, and trigger the fire alarm whenever an opinion may clutter your perception of reality and what must be done.


It all comes down to the R: Results. They provide greener pastures and better crops; they must be found, measured, and compared. As a consequence of great results, a mentor may become an advisor, investor, board member or earn sweat equity. I dare to suggest a recipe for R:

  1. Finish all mentoring sessions with “What have we learned today?”
  2. Then ask “What are the key issues that need further addressing?”
  3. Then ask “Who will take care of what?”
  4. Take notes of “Who – What – When” to make sure things get done
  5. Follow-up on those notes at the start of the next session
  6. Mark down the strongest results so you can review them later

Make sure results are tracked; see that the work and effort spent on mentoring sessions will not be lost into oblivion. Keep them either on a shared Evernote, spreadsheet, or even Slack channel, and you’ll be amazed of how much can be done with mentoring if you follow this framework.

Exercise all six concepts equally

First of all, remember that the best mentoring is long-term. Quick feedback sessions can make great use of this framework, but its real benefits are only tangible over frequent sessions.

I don’t believe I’m the best mentor many people have had. I’m more demanding than I should, way too blunt sometimes, but that bug is my best feature to help get things done. The specific issues I need work (and constantly try to exercise that) are E and T, and my highlights are M, O, and R. So I do recommend you try to know what your strengths are, and improve your weak spots.

It’s hard to go through all six concepts in MENTOR on a single mentoring session, but always keep them in mind. As your experience progresses (or as a founder, as your mentoring sessions flow) you start getting the whole picture and the modus operandi unconsciously falls into place. If you’re a bad mentor, you will get better by exercising this framework. If you’re already a good mentor, you will gradually notice your effectiveness increases as the time passes; and if you’re a founder, you may use it to make sure your mentoring sessions – good or bad – tilt towards what you need by getting the mentor into the right path.

Click the image below to download a quick reference card on the MENTOR framework. It is yours to use – let me know how it goes.