Category: risk
February 14, 2019 Paul Arnold via Forbes : There Are Only Three Venture Capital Strategies
The power law of returns dominates startup investing. Much has been said on the topic (like here, here, here, here, here, here, or here). What matters for a venture strategy is that nothing is more determinative of a fund's success. Power-law distribution is the architecture of the whole game. I measure any investing approach against its impact on the power-law distribution. This is the acid test of what is actually effective. And while it is true that adding value, sourcing better, and investing better are all good strategies other investing situations, the effects, especially of 2 and 3, are especially significant in venture where the power curve has a large exponent. (read more…)
CATEGORY: growth, risk, VC, winner take all
February 12, 2019 Mark Suster : Why Has Seed Investing Declined? And What Does this Mean for the Future?
With seed up massively between 2006–2014 and A and B rounds relatively flat what you see is a widening of the funnel going into traditional venture. This is why many VCs are waiting and letting deals mature a bit before leaning into rounds. Traditional VCs have raised larger funds that allow them to pay slightly higher prices and still hit preferred ownership sizes. (read more…)
CATEGORY: risk, VC, winner take all
January 11, 2019 New York Times : More Start-Ups Have an Unfamiliar Message for Venture Capitalists: Get Lost
The event had been organized by Frank Denbow, 33, a fixture of New York’s tech scene and the founder of T-shirt start-up Inka.io, to bring together start-up founders who have begun to question the investment framework that has supercharged their field. By encouraging companies to expand too quickly, Mr. Denbow said, venture capital can make them “accelerate straight into the ground.” (read more…)
CATEGORY: growth, risk, valuation, VC
November 30, 2018 Earnest Capital : Shared Earnings Agreement
A Shared Earnings Agreement (we shorthand it as SEAL) is typically used as a substitute for equity-like structures like a SAFE, convertible note, or equity. It is not debt, doesn’t have a fixed repayment schedule, doesn’t require a personal guarantee. The goal of a SEAL is to align the interests investors and founders in a wide variety of outcomes, while giving founders full control of their business and keeping as much optionality as possible open for the business. A SEAL is a long-term commitment that in most cases lasts for the lifetime of the business, so pick your partners wisely. (read more…)
CATEGORY: alternative financing, debt, risk
November 29, 2018 Pitchbook : Why this VC puts efficiency above unicorns
If you put too much money in too early, you're going to destroy the cap table and possibly see the team losing focus because they are not ready and don't know how to deploy it properly. You're also going to artificially inflate its valuation, which in the short term might make the entrepreneur happy because of the paper wealth, but what happens if they don't outperform an already-aggressive business plan? (read more…)
October 10, 2018 CNBC~ : Start-up economy is a ‘Ponzi scheme,’ says Chamath Palihapitiya
Chamath Palihapitiya, the outspoken Silicon Valley tech investor, called the start-up economy a charade on Wednesday, while also addressing the current the state of Social Capital, his embattled investment firm. "We are, make no mistake … in the middle of an enormous multivariate kind of Ponzi scheme," said Palihapitiya, at the Launch Scale conference in San Francisco. (read more…)
CATEGORY: risk, valuation, VC, winner take all
August 22, 2018 The Quantified VC : How to Win in Venture Capital: Focus on the Fat Tails
Since the track record of VCs is overwhelmingly skewed by a tiny handful of “unicorns,” entrepreneurs who try to assess the reputation of VCs by only looking at home-runs may get a skewed view. In good times, investors will be supportive. But how will they behave during bad times? Even great companies go through ups and downs. If your startup is not one of the big winners (which is likely, based on probabilities), how will your VCs behave? Will they abandon ship?—?or worse, will they turn negative or downright hostile? (read more…)
CATEGORY: risk, valuation, VC, winner take all
July 17, 2018 Chris Savage & Brendan Schwartz via Wistia : How an Offer to Sell Wistia Inspired Us to Take On $17M in Debt
Most founders dream of building a product that eventually becomes a household name and sells for a billion dollars, but chasing that goal comes with some downsides. We chose a different path. (read more…)
CATEGORY: bootstrap, capital, leadership, risk
June 20, 2018 Ilya Strebulaev via Stanford GSB : Inside the Secret World of Venture Capital
If you think talking a venture capital firm into funding your startup is hard, try getting one to share its secrets with you. That’s the challenge Stanford Graduate School of Business finance professor Ilya Strebulaev took on when he founded the Stanford Venture Capital Initiative, which has been steadily amassing a deep and unprecedented database designed to figure out how the VC world really works (read more…)
May 29, 2018 Clint Korver, Ulu Ventures : Picking Winners is a Myth, but the Power Law is Not
In short, VCs cannot reliably pick winners. They can, however, construct portfolios that consistently generate great returns. Simply stated, more investments give a venture firm better odds of investing in an outlier company that can make a fund. However, there are limits. Portfolio construction requires weighing the benefits of diversification against a VC’s ability to generate and support high-quality investments. Striking the right balance separates great VCs from the rest. (read more…)
CATEGORY: risk, VC, winner take all