April 16, 2018 Seth Levine : What’s the Optimal Portfolio Strategy for a Venture Fund?

Last year I wrote a few posts (here and here) that talked about how skewed venture returns were. The key take-away graphic from that post is below – outsized returns on venture investments are rare. Much rarer than most people realize. (read more…)

CATEGORY: risk, valuation, VC, winner take all

March 22, 2018 CB Insights : From Alibaba to Zynga: 28 Of The Best VC Bets Of All Time And What We Can Learn From Them

In venture capital, returns follow the power law — 80% of the wins come from 20% of the deals.  Great venture capitalists invest knowing they’re going to take a lot of losses in order to hit those wins.  Chris Dixon of top venture firm Andreessen Horowitz has referred to this as the “Babe Ruth effect,” in reference to the legendary 1920s-era baseball player. Babe Ruth would strike out a lot, but also made slugging records.  Likewise, VCs swing hard, and occasionally hit a home run. Those wins often make up for all the losses and then some — they “return the fund.” (read more…)

CATEGORY: risk, VC, winner take all

February 20, 2018 Alessandro Pluchino : Talent vs Luck: the role of randomness in success and failure

The largely dominant meritocratic paradigm of highly competitive Western cultures is rooted on the belief that success is due mainly, if not exclusively, to personal qualities such as talent, intelligence, skills, efforts or risk taking. Sometimes, we are willing to admit that a certain degree of luck could also play a role in achieving significant material success. But, as a matter of fact, it is rather common to underestimate the importance of external forces in individual successful stories. It is very well known that intelligence or talent exhibit a Gaussian distribution among the population, whereas the distribution of wealth - considered a proxy of success - follows typically a power law (Pareto law). (read more…)

CATEGORY: resilience, risk, winner take all

January 8, 2018 Christian Knott via Medium : The Risk-Return Profile of Venture Capital

When analysing actual fund performances [...] results ranged from -50% IRR to over 200% IRR with an average of 6%. A surprising result given that frankly, I would have expected a portfolio of less risky assets to return 6% and much more from Venture Capital. By the way, it does not become prettier when looking at the median performance that is -6%. In context, this means that a majority of venture funds loses money, with a small number of funds delivering very strong returns** (read more…)

CATEGORY: risk, VC, winner take all

December 20, 2017 Luke Kanies via Medium : Venture Capital Is Built on Serendipity

Venture investing is fundamentally uncertain. You’re making big bets on people, ideas, and markets that might never work out, and there are more ways to fail than succeed. As a result, investing has to take into account the likely failure of many efforts. If your financial model assumes each of your investments will be a success, you will have a short career indeed. (read more…)

CATEGORY: risk, VC, winner take all

December 7, 2017 Luke Kanies via Medium : Unicorns Distract Us from a Graveyard

I’m convinced that a firm that directly invested in reducing its failure rate would have as many unicorns, but it would also have more positive returns throughout its portfolio, and in the midst of building more companies and making more money, it just might do a little good at the same time. That would be a nice change. (read more…)

CATEGORY: risk, VC, winner take all

December 3, 2017 Jerry Neumann : Power Laws in Venture Portfolio Construction

Every person in venture, when pushed on why either so many companies don’t succeed or on why any young company deserves to be valued at $1 billion or more, says that it’s because venture-backed companies follow a power law. But when they think about portfolio construction, they treat outcomes as some other sort of distribution, one that’s easier to reason about. This post will take the hard road and try to reason about power law distributions. That means math, and code. (read more…)

CATEGORY: risk, VC

November 29, 2017 Hunter Walk : For VCs, “What Could Go Right” Is More Important Than “What Could Go Wrong”

VCs are in the business of backing companies that have a substantial chance of failing and the earlier you invest, the more likely you are to see a zero return on your capital. What offsets this is that the successes tend to be outsized, returning 20x, 50x, or even 100x+. The notion that tremendous value is created by a very small percentage of startups, and the financiers behind this businesses are counting on a few of these companies to make up for all the nonperforming investments is called a power law distribution. (read more…)

CATEGORY: risk, VC, winner take all

November 28, 2017 Pitchbook : Why unicorns are overvalued (and the industry knows it)

The rise of private market unicorns is well known—rising from 40 in the US when the term was coined four years ago to more than 120 now. The cumulative unrealized value of current US unicorns is approaching $600 billion, per PitchBook data. Exit times are lengthening, giving rise to a dynamic I've dubbed the "zombiecorn" as VC-backed companies stay private for far longer than has been seen historically.  But what if it's all built on a lie? (read more…)

CATEGORY: risk, valuation, VC

November 27, 2017 Pitchbook : 16 charts showing current trends in US venture capital

As of the end of the third quarter, this year is set to reach a decade-high in terms of total VC investment—but deal activity is on pace to decline sharply for the second year in a row (read more…)

CATEGORY: risk, VC, winner take all