Category: VC
June 8, 2015 Chris Dixon from A16z : Performance Data and the ‘Babe Ruth’ Effect in Venture Capital
“How to hit home runs: I swing as hard as I can, and I try to swing right through the ball… The harder you grip the bat, the more you can swing it through the ball, and the farther the ball will go. I swing big, with everything I’ve got. I hit big or I miss big.” –Babe Ruth One of the hardest concepts to internalize for those new to VC is what is known as the “Babe Ruth effect” (read more…)
CATEGORY: valuation, VC, winner take all
November 12, 2014 Fenwick & West : Silicon Valley Venture Survey – Third Quarter 2014
Distribution of Venture Returns. It is well known that venture investing is a very risky business, with the key to success often being the one investment that provides a huge return to offset the numerous money losing or small return investments in a fund. (read more…)
CATEGORY: risk, VC, winner take all
July 21, 2014 Andreessen Horowitz : 12 Things I Learned From Marc Andreessen
#1 “The key characteristic of venture capital is that returns are a power-law distribution. So, the basic math component is that there are about 4,000 startups a year that are founded in the technology industry which would like to raise venture capital and we can invest in about 20.” “We see about 3,000 inbound referred opportunities per year we narrow that down to a couple hundred that are taken particularly seriously… There are about 200 of these startups a year that are fundable by top VCs. … about 15 of those will generate 95% of all the economic returns … even the top VCs write off half their deals.” #10 “There’s a new generation of entrepreneurs in the Valley who have arrived since 2000, after the dotcom bust. They’re completely fearless.”… “Founders today are very technical, very product centric, and they are building great technology and they just don’t have a clue about sales and marketing…it’s almost like they have an aversion to learning about it.” “Many entrepreneurs who build great products simply don’t have a good distribution strategy. Even worse is when they insist that they don’t need one, or call no distribution strategy a ‘viral marketing strategy’ … a16z is a sucker for people who have sales and marketing figured out.” (read more…)
CATEGORY: leadership, product-market fit, VC
September 18, 2013 Todd Hixon via Forbes : Spring In Venture Capital
What we are seeing here is the end of a long, painful correction. The venture industry and the entrepreneurial world grew extremely fat in the late 1990s, when money was very easy, and it has taken almost 15 years for the surplus capital, funds, and companies from that era to exit or fade away. My old boss liked to say: “When everyone runs to one side of the boat, the other side will likely be drier”. Warren Buffett has a saying like this too. It’s very hard to call the exact bottom of a cycle. It’s reasonably possible to know when a sector has fallen far below its long-term norm and is due for recovery before long. That’s the way I see venture capital now. (read more…)
July 16, 2013 Felix Salmon via Reuters : Art, venture capital, and down-round phobia
Valuations go up and down, but no one likes to admit it; investors, in particular, love to delude themselves that the value of the company only went up after they bought in, and that they got a spectacular deal. Indeed, this is one of the reasons why so many startups fail: taking VC money is a deal whereby, in practice, if you don’t grow super-fast, in both size and valuation, then you will be left for dead. David Segal, on Sunday, had an intriguing piece about what you might call distressed startup opportunities, but that’s a very, very new market, and one which VCs aren’t yet interested in. (read more…)
May 7, 2012 Kauffman Foundation : We Have Met the Enemy…and He is Us: Lessons from Twenty Years of the Kauffman Foundation’s Investments in Venture Capital Funds and the Triumph of Hope Over Experience
VC returns haven’t significantly outperformed the public market since the late 1990s and, since 1997, less cash has been returned to investors than has been invested in VC. Our research suggests that investors like us succumb time and again to narrative fallacies, a well-studied behavioral finance bias. (read more…)
CATEGORY: capital, VC, winner take all
April 26, 2012 Blake Masters : Peter Thiel’s CS183: Startup – Class 7 Notes Essay
An example will help clarify. If you look at Founders Fund’s 2005 fund, the best investment ended up being worth about as much as all the rest combined. And the investment in the second best company was about as valuable as number three through the rest. This same dynamic generally held true throughout the fund. This is the power law distribution in practice. To a first approximation, a VC portfolio will only make money if your best company investment ends up being worth more than your whole fund. In practice, it’s quite hard to be profitable as a VC if you don’t get to those numbers. (read more…)
CATEGORY: VC, winner take all
December 3, 2010 Harvard Business Review : Risk & Reward in Venture Capital
This note describes the payoff structure of investment in individual venture capital-backed companies and in venture capital portfolios. Venture Capital investments are characterized by high failure rate (Over 50%) and a small number of given successes (greater than 10% returns). As an asset, class, venture capital has produced high cyclical returns that mirror trends in capital markets and in markets for new technology. There is a large disparity in median and upper quantize performance. A small number of funds do well on a constant basis. Overall returns on venture capital have been low for the decade ending in 2009. (read more…)
CATEGORY: VC, winner take all
April 12, 2009 Rassoul Yazdipour from California State University, Fresno : What can venture capitalists and entrepreneurs learn from behavioral economists?
In a nutshell, what this really means is that we as VCs and/or entrepreneurs may do all the sophisticated analyses, formal due diligences, and complicated evaluations and valuations on a given venture using our brain’s computer-like (rational) subsystem [...] we need to: a. Be at least aware of the inner working of our brain and get to know how in reality we as individuals arrive at a given judgment and choice; and b. Become aware of the main psychological traps and biases that continuously get turned on at and around our decision making times. We may not be fully capable of debiasing our choice process, but still this is much better than the alternative. (read more…)
CATEGORY: resilience, risk, VC
January 25, 2008 Millennium Technology Value Partners : Inside the Growing Secondary Market for Venture Capital Assets
For the last decade, secondary market activity involving all types of private equity investments has been a booming and increasingly efficient aspect of the far larger overall private equity market. Total secondary private equity transactions have grown 14-fold over the last ten years, from approximately $600 million in 1998 to well over $8 billion in 2007. A typical venture capital partnership is organized around a 10-year lifespan. During this ten year period many internal and external forces may intervene that can result in investors desiring earlier cash distributions. The vicissitudes of time and financial markets can also suggest critical changes in strategy or technology or sector focus are needed. For these reasons, investors—as well as venture capital fund managers themselves—are increasingly interested in tapping the secondary market for partial or complete exits earlier than seven years into an investment. (read more…)
CATEGORY: secondaries, VC