Category: VC
November 23, 2020 Charles Duhigg via the New Yorker : How Venture Capitalists Are Deforming Capitalism
Whereas venture capitalists like Tom Perkins once prided themselves on installing good governance and closely monitoring companies, V.C.s today are more likely to encourage entrepreneurs’ undisciplined eccentricities. Masayoshi Son, the SoftBank venture capitalist who promised WeWork $4.4 billion after less than twenty minutes, embodies this approach. In 2016, he began raising a hundred-billion-dollar Vision Fund, the largest pool of money ever devoted to venture-capital investment. “Masa decided to deliberately inject cocaine into the bloodstream of these young companies,” a former SoftBank senior executive said. “You approach an entrepreneur and say, ‘Hey, either take a billion dollars from me right now, or I’ll give it to your competitor and you’ll go out of business.’ ” This strategy might sound reckless, but it has paid off handsomely for Son. (read more…)
CATEGORY: leadership, risk, VC
October 5, 2020 Seth Levine : VC Fund Returns Are More Skewed Than You Think
I thought about this a couple of years ago when I wrote about the optimal venture fund strategy and my conclusion was that venture firms should place more bets and have more exposure across a larger set of businesses. Obviously, those inside the industry argue that managers who are good at picking businesses would do better to own more of fewer businesses if they can show that they have the aptitude to invest in those that become true outliers. But given how rare they are, I wonder if that is arguably the optimal strategy. As David Cohen replied once years ago when I asked him what the key to being a successful venture capitalist was: “Luck”. (read more…)
CATEGORY: risk, VC, winner take all
September 30, 2020 Harvard Business Review : What’s Next for Silicon Valley?
Over the last 20 years, Silicon Valley has benefited from a once-in-a-lifetime alignment of advantages. American primacy, the ubiquity of cheap capital, the arrival of the smartphone (among other widely adopted tech innovations), and, perhaps most significantly, a benign regulatory environment have all conspired to create a historic concentration of wealth and power. The titans of the Valley and their heirs have been free to roam far ahead of lawmakers, watchdogs, and tax codes. That might not be true for much longer, however. Despite the fact that many public tech companies saw their valuations skyrocket during the lockdown and that the Covid-19 pandemic has accelerated mass adoption in e-commerce, online payments, telemedicine, and video conferencing, there are signs that the gilded age for consumer internet businesses may be drawing to a close. (read more…)
September 29, 2020 Institutional Investor : The Pervasive, Head-Scratching, Risk- Exploding Problem With Venture Capital
Is venture capital a risky asset class? No. Most VC funds choose to act in a risky manner by not diversifying, but that does not make the asset class risky. To de-risk venture capital, CIOs simply need to acknowledge that VC math is different from public markets math. The importance of low-probability, excess-return-generating investments means that proper diversification requires a portfolio of at least 500 startups. It will take work to assemble such a portfolio. It is hard to do by investing directly. Current funds and funds-of-funds are rarely designed with diversification in mind. Instead, they concentrate funding in a small subset of ultra-popular entrepreneurs, sectors, and geographies, which risks driving down returns on capital, leaving higher-return strategies underfunded. So why are funds reluctant to offer such diversification? There are no rewards for diversification as a venture GP. Today’s investors flock to top-quartile managers, who must act in a risky manner to overachieve. Such GPs often insist that their portfolios must stay small to “not dilute their winners.” In other words, they rely on picking winners, but inadvertently admit to not being able to do so consistently. Managers who reduce risk by diversifying will, by definition, at best achieve second-quartile returns. Only the top quartile is rewarded, through performance and management fees on larger follow-on funds. Given the ten-plus-year life of each fund, and the way capital floods to proven winners, it is economically rational for a GP to take a risk at getting lucky with an undiversified fund rather than diversifying — knowing that diversifying would result in fewer if any rewards. This is especially true since most GPs show signs of overconfidence about their abilities, and trust that they will outperform, believing it will happen through skill, not luck. (read more…)
September 17, 2020 Alex Danco : Are Founders Allowed to Lie?
Founders use this soft power to their advantage. When blessed by their VCs, they are uniquely permitted to “pre-tell” the truth in a way that no one else is allowed to do, so long as they observe all of the unwritten rules in doing so. You can’t push it too much; you can only push it in certain ways and not others; and most importantly, you must genuinely do so in an effort to bootstrap the future into existence. You’re not misleading investors; your investors get it: they’re optimizing for authenticity over ‘fact-fulness’. It’s not fraud. It’s just jump starting a battery, that’s all. You’ve all seen this. It doesn’t look like much; the overly optimistic promises, the “our tech is scaling nicely” head fakes, the logo pages of enterprise customers (whose actual contract status might be somewhat questionable), maybe some slightly fudged licenses to sell insurance in the state of California. It’s not so different from Gates and Allen starting Microsoft with a bit of misdirection. It comes true in time; by the next round, for sure. (read more…)
CATEGORY: leadership, VC
August 4, 2020 Morgan Stanley : Public to Private Equity in the United States: A Long-Term Look
The dispersion between the best and worst funds is very high in venture capital relative to other asset classes (see exhibit 43). As we reviewed earlier, median returns to investors have been lackluster since 2000, but this hides the fact that top performing funds have generated very good returns. Identifying which funds are in the top quartile can be tricky. Indeed, more than one-quarter of all funds claim to be in the top quartile. The reason is that there are different ways to measure results, including various benchmarks, performance measures, and data sources. Outlook. The outlook for returns from U.S. venture capital in the aggregate, given investor commitments and fund investments, appears to be consistent with the recent past. The dispersion of returns within the asset class suggests that investors who have access to top tier funds will continue to earn very attractve returns. It also stands to reason that the large swell of investment in late-stage venture will earn lower returns than the smaller sum invested in early stage. (read more…)
August 3, 2020 The Hill : Revaluing venture capital
One of the strategies to address this issue has been to create “carve outs” or small allocations from big funds to invest in diverse fund manager and entrepreneurs. Institutions like Goldman Sachs have done just that. There are a few challenges with this model. First, most institutions have criteria that does not allow them to invest in first-time fund managers. In a world where only 14 percent of investment managers are female, with a significantly smaller number having run a fund before, how can we possibly widen the pool? Layered on top of this challenge is the financial burden it takes to get a fund up and running. Many managers have to forgo salary for at least a year while they are fundraising (and those are the lucky ones who even raise a fund). Very few women and minorities have this kind of capital cushion. In addition, fund managers have to commit 1 percent of the total fund size. So, if I raise a $50 million fund, I have to put in $500,000 of my own money. Potential investors base their diligence on how much “skin in the game” the managers have committed. I don’t have that kind of money, and I know many others in my position don’t either. These are meaningful technical issues that can and need to be addressed. But those technical issues are not the biggest hurdle. Women and minorities think differently; they run companies differently; they communicate differently, and they see opportunity in different places. In short, you can’t just put a woman or minority in the position and expect her to act like the traditional male investor or entrepreneur. To change the diversity of the industry we must be willing to embrace divergent cultural styles, different ways of communicating, and new ways of assessing market opportunities. (read more…)
CATEGORY: capital, leadership, VC
July 24, 2020 Josh Lerner and Ramana Nanda, Harvard Business School : Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn
Just how large a temptation the venture capital compensation scheme can pose is illustrated in the work of Metrick and Yasuda (2010), who show that of every $100 invested by the limited partners, over $23 end up in the pockets of the venture investors. These sums might not be disturbing if the very substantial payouts to each partner reflected even larger returns being made by the limited partners in the fund. But profit-sharing is not the most important source of compensation. Instead, almost two-thirds of the income (in time-adjusted dollars) is coming from the venture capital management fees, which remain fixed whether the fund does well or poorly. These incentives clearly may motivate groups to add capital in excess of the growth of partners, even if performance suffers somewhat. (read more…)
June 25, 2020 Fred Wilson : Board Diversity
Ten years ago the tech/startup/venture industries started to make gender balance a priority in management teams, boards, and the venture capital industry. While we are not where we need to be, we have made good progress. We can do the same with diversity across the board. We can use the same approaches and the same persistent approach to the issue. (read more…)
CATEGORY: leadership, VC
May 18, 2020 The Verge : A pizzeria owner made money buying his own $24 pizzas from DoorDash for $16
The answer isn’t clear because we’re very far from the old ways. By the magic of venture capital, some businesses don’t have to make money to survive. And that’s upended things for everyone. “Third-party delivery platforms, as they’ve been built, just seem like the wrong model, but instead of testing, failing, and evolving, they’ve been subsidized into market dominance,” as Roy puts it. “The more I learn about food delivery platforms, as they exist today, I wonder if we’ve managed to watch an entire industry evolve artificially and incorrectly.” (read more…)
CATEGORY: capital, profitability, VC