Category: VC
November 7, 2021 Becker Friedman Institute for Economics at University of Chicago : Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds
It has long been conventional wisdom for investors in private equity to choose funds run by managers who have performed well in the past, particularly, so-called top-quartile funds, while avoiding first-time funds. This conventional wisdom is based on the belief that performance in private equity persists across successive funds – typically organized as limited partnerships – with the same manager (the general partner or GP). For buyout funds with post-2000 vintages, performance persistence based on fund quartiles disappears. When funds are sorted by the performance quartile of the GP’s previous fund at the time of fundraising, performance of the current buyout fund is statistically indistinguishable regardless of quartile. First-time funds perform at least as well as any of the groups based on prior fund quartile rankings. Moreover, returns for buyout funds in all previous fund quartiles as well as first-time funds exceed those of public markets as measured by the S&P 500. For VC funds, in contrast, performance persistence still exists, when measured by the final (or most recent) performance of funds: top quartiles tend to repeat such performance nearly 45% of the time. VC funds with previous performance in both the top and second quartiles outperform the S&P 500. This is not consistent with the view that only very few VC funds outperform. In fact, previous funds that are above median appear to do so. (read more…)
August 4, 2021 The Information : The End of Venture Capital as We Know It
The net takeaway is that in the last several years, as software investing has gone from fringe to mainstream, enormous flows of global capital have been unlocked to finance software and the internet at increasingly competitive rates. What this means for investors who focus on Series A investment rounds and beyond is that the market should become more and more efficient while investing becomes less and less profitable. However, if you want to be a venture capitalist leading the next era, you should look for opportunities no one else is funding because they are too weird, too crazy or too small—at least today. There is a truism that as startups mature, they eventually look pretty much exactly like the companies they set out to disrupt. Today’s prominent VC firms will follow the same trajectory. And the boutique investors will move on. (read more…)
February 26, 2021 Wall St Journal : SPAC Frenzy Emboldens Silicon Valley Startups to Forgo Venture Funding
SPACs have flipped the script on the multidecade model of development for early-stage startups, enabling fledgling companies with little or no revenue to tap public markets sooner. The shift lets amateur investors—long excluded from startup wealth creation—get in on the ground floor of disruptive businesses. It is a dynamic that can lead to huge returns but also carries big risks, as young companies are far more vulnerable to going belly up. Jay Ritter, a finance professor at the University of Florida who studies public stock listings, found that the shares of tech companies going public with annual sales under $50 million underperform the market by 28% over the first three years of trading. The median annual sales for tech companies completing a SPAC deal since the start of 2020 is $48 million. (read more…)
CATEGORY: alternative financing, capital, VC
February 8, 2021 Andranik Tumasjana, Reiner Braun, Barbara Stolz in the Journal of Business Venturing : Twitter sentiment as a weak signal in venture capital financing
How do venture capitalists (VCs) incorporate weak and strong signals in the valuation of technology-based startups? Based on a sociocognitive perspective of signaling theory, we introduce Twitter sentiment as a novel and weak signal, which we juxtapose with patents as a traditional, strong signal. While we find a positive association between both signals and VCs' venture valuations, our results reveal that Twitter sentiment does not correlate with actual long-term investment success, whereas patents do. (read more…)
CATEGORY: valuation, VC
February 5, 2021 Semil Shah via Twitter : 2021 Venture Capital Market Dislocation – “WTF Is Going On?”
Adam Nash tweeted this earlier, paraphrased: "The VC industry went from looking for $1 billion-dollar outcomes to $10 billion-dollar outcomes to $100 billion-dollar outcomes in less than 24 months. This end-market acceleration has occurred during a time of zero-interest rates (not being touched until 2023, per Fed), high IPO liquidity, huge chip stacks at various VC funds, and making investments via Zoom. Investing in technology feels like the only game in town now in a pandemic world. Public investors are now full in privates; growth investors are doing As and Bs like they're seeds; traditional VC firms are straddling seed and Series A (tho many have multi-stage arms); and seed investors, angels, rolling funds, syndicates, accelerators are conducting massive experimentation to unearth the next great thin. (read more…)
CATEGORY: capital, risk, VC, winner take all
February 1, 2021 Brett Fox via Medium : What Happens When Your Investors Give Up on Your Startup?
But none of this answers why Donald Ventures would kill a company they decided not to invest in. Here’s my educated guess as to why they would act this way. It’s much easier to not have to explain to a limited partner (the people that invest in a VC fund) why you gave up on a company that later became a success. So, you just kill every company you walk away from.
And, you the entrepreneur that gave your blood trying to make the company a success, you’re just collateral damage.
(read more…)CATEGORY: resilience, VC
January 13, 2021 Pitchbook : PitchBook-NVCA Venture Monitor Q4 2020 Report
At the outset of the pandemic, many thought the US venture industry was staring down a major decline, but 2020 actually ended with new records in dealmaking, exit value, and fundraising. Investors and LPs remained active, and tech-enabled industries rode tailwinds created by the pandemic-forced unlocationing of business, education and healthcare. 2020 top-line figures of the US VC industry are staggering: $156.2 billion invested, $290.1 billion exited, and $73.6 billion raised by VC funds. These record figures should set the industry up for continued strength moving into 2021. (read more…)
January 11, 2021 Alex Danco : Why the Canadian Tech Scene Doesn’t Work
Successfully funding a VC-backed company all the way through series C or whatever (at which point something resembling an actual valuation can take place) is essentially an exercise in rolling forward a “discount on a discount on a discount”: I’ll pay this $6M pre-seed valuation, not because there’s $6 million of tangible value here, but because it’s a discount to the next round (20), and then the next (50) and then the next (180). VC financing is a controlled bubble. This method, as recursive as it sounds, is a legitimate financing innovation: it lets startups dig deeper into the J curve, repeatedly financing their business off of the possibility of “what could go right”. But for it to work, you can never at any point formally value what’s been built. If you do, you puncture the bubble. (The exception is 409A valuations, which you want to be as low as possible. The sleight of hand with these, of course, is fantastic. Valuations are high and aspirational when we need them to be high, versus low and literal when we need them to be low.) The difference between the Canadian startup ecosystem versus the actually-functioning one in the Bay Area isn’t an incremental difference of degree. They’re two systems running in totally contrasting modes: one runs fast, rules opportunities in, rolls valuations forward, and is optimized for infinite-game-mindset founders. The other runs slow, rules opportunities out, feels the need to “defend” valuations (thereby collapsing them to their literal milestone value) and optimizes for fixed, finite games. (read more…)
CATEGORY: VC, winner take all
December 21, 2020 Pitchbook : The year in charts: VC defies 2020 expectations despite the pandemic
VC dealmaking in the US remained incredibly resilient in 2020, with companies raising nearly $148 billion as of Dec. 14, according to PitchBook data—already a decade high. The total number of VC deals this year, however, dipped from a high achieved in 2019. Much of that funding activity can be attributed to the fat checks investors wrote for their existing, later-stage portfolio companies better suited to survive the worst of the pandemic. That didn't bode well for early-stage investments, which have dropped off significantly this year. (read more…)
CATEGORY: capital, VC, winner take all
December 1, 2020 National Bureau of Economic Research : Hidden in Plain Sight: Venture Growth with or without Venture Capital
In our matched sample estimates, VC funded firms are 6 times more likely to grow than non-VC-funded firms of comparable quality. Furthermore, when we focus on the right tail of the estimated VC Likelihood distribution, the ‘VC-effect’ is substantially reduced: firms in the top 0.05% of our quality measure at birth, are only 2.3 times more likely to grow with VC funding than without it. (read more…)