When I used to do fund of fund investing, we looked at 3 things
1) Organizational stability
2) Track record
3) Competitive advantage, usually through proprietary deal flow, or value add as vouched for by CEOs of succesful portfolio company exits.
The #1 reason funds fail is due to a lack of organizational stability. Venture funds are remarkably unstable given the small size of the staff and the large size of the egos. Also, issues of sharing the carried interest when every GP has up and down cycles is challenging. Also, if the fund's returns deteriorate and people leave, the LPs are left holding the bag on how to harvest the portfolio. Successful harvesting of a mediocre fund can be the difference between returning your capital or losing it.
Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.