By Dan Primack
April 7, 2011

Forbes today resurrected its Midas List, the annual ranking of 100 top venture capitalists that it seemed to kill off two years ago. That also means that it has resurrected the debate over whether or not the rankings are accurate.

To be sure, this is a massive undertaking. Forbes begins by compiling all IPOs or M&A transactions over the past five years, and then focuses on the ones worth at least $200 million (Asia-based companies are excluded, with an Asia-specific list in the works). It then adds a bunch of additional metrics. For example, multiple exits are weighted heavier than one-hit wonders. Early-stage deals are weighted heavier than later-stage deals. And men are weighted heavier than women (just kidding, but the inclusion of just two women may be the real story of this year’s list).

The revised methodology is a clear improvement from past efforts, and Nicole Perlroth’s profile of King Midas (Accel Partners’ Jim Breyer) is superb. So what follows should be considered constructive nit-picking:

Assigning any weight to unrealized, still-private portfolio companies. The term Midas List was originally chosen to indicate that its members had generated actual gold (okay, greenbacks) for their investors. As such, it focused on exits as opposed to investments in hot private companies that may, or may not, ultimately justify their astronomical valuations.

This list, however, chose to include a small handful of “highly-valued private companies.” Forbes isn’t saying which ones, but I’m pretty sure they include Facebook, Groupon and Zynga. In fact, over half of the “key companies” listed in the profiles of the top ten Midas Listers are still sitting within VC portfolios. For example, only one of the six companies listed for Greylock’s Reid Hoffman has been sold or taken public (, sold to CBS).

It certainly is true that certain VCs have generated partial liquidity from these deals — such as Accel Partners dumping less than 20% of its Facebook position, and in the process returning its entire fund — but most of the real value remains unrealized. Moreover, the listed valuations sometimes have been set by these very same VCs (who sit on the company boards). Forbes says it used a deep discount for such companies, but you’re still bound to have serious skew when we’re talking about $25 billion or $50 billion valuations.

Maybe the best solution would have been to only use actual liquidity, and then do a side feature for “the future Midas List.”

Focusing on first-day market cap for VC-backed IPOs. Most venture capitalists don’t sell shares at the time of IPO, and then only partially bleed out when the initial lock-up period expires. In other words, first-day market cap matters much more for the companies and the bankers than for the VCs.

For example, Sequoia Capital’s Mike Moritz gets credit for the IPO of battery maker A123 Systems Inc. (AONE), which went public in September 2009. The company priced its shares at $13.50 a pop, and finished its first day of trading at $20.29 per share. At that price, Sequoia’s stake was valued at over $58 million. But the firm didn’t sell at IPO, and those same shares today would be worth just around $17 million (I can’t find a record of Sequoia selling any shares so far, which may be because the firm falls below the 5% ownership threshold).

Forbes says it only uses post-IPO trading value as a secondary consideration. It should be the other way around.

Exits only matter as a multiple of entry. It’s great when a VC-backed company gets sold for $200 million. Well, unless the VCs had first invested at a $220 million valuation.

Forbes only seems to concentrate on the sale price, rather than the purchase price. Or the amount of money that VCs initially invested. There are plenty of $300 million sales that actually work out to lousy VC returns, just as there are plenty of $50 million sales that could be considered grand slams.

Beware of the background bias. Forbes says that it “introduced an expert panel of our very own Deep Throats–professionals from a premier global investment consulting firm and a leading foundation’s investment office–to inform our final ranking.” This is too bad, because Midas List is supposed to be quantitative/objective rather than qualitative/subjective.

Readers are not told who these background sources are, so we are left without knowing their biases. Moreover, very few consulting firms or foundations truly have insight into every single partner at every single firm. Usually it’s only the ones in which they’ve invested or on whom they’ve conducted serious due diligence. Perhaps this was used as a backstop against some sort of unfortunate error, but I think it would have been worth taking the risk.

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