December 12, 2019 Kauffman Fellows : Venture Returns With Abe Othman of AngelList

In a blockbuster conclusion, you found that seed stage investors should put money into every credible deal – this is a surprising finding! Yes, we found that investors could benefit from indexing as broadly as possible at the seed stage, by putting money into every credible deal, because any selective policy for seed-stage investing—absent perfect foresight—will eventually be outperformed by an indexing approach. We did do some simulations, not in the publication, on what indexing at seed actually looks like over human timescales. Over a ten-year investment window, indexing beats 90-95% of investors picking deals, even when those investors have some alpha on deal selection. So the idea that there are some terrific seed investors that soundly beat indices is not inconsistent with our results. (read more…)

CATEGORY: risk, VC

December 3, 2019 Aaron Dinin via Medium : Venture Capitalists Don’t Invest in Magic. Neither Should You.

Instead, the kinds of growth companies should be studying, charting, and analyzing is intentional, controlled growth. That means growth driven from things like replicable marketing campaigns, sales funnel optimizations, and improving your company’s customer success process. Simply put, when you can attribute a sale to a specific and intentional action your team has taken, and when you can consistently repeat the action to achieve similar results, that’s when it’s reliable, predictable, investable growth. Everything else is just magic: fun to watch, but not something you can invest in. (read more…)

CATEGORY: growth, leadership, product-market fit, VC

November 4, 2019 Lighter Capital : How Revenue-Based Financing and Venture Capital Funding Work Together

As alternative financing solutions attract more attention from entrepreneurs, some VC investors are noticing more startups are turning to these options for their growth and working capital needs, many times mixing and matching RBF with a term loan, line of credit with a forward commitment, or both. These flexible, non-dilutive financing solutions scale with a business’ growth, enabling entrepreneurs to focus on their business without giving up equity, personal guarantees, or board seats; it’s understandable why entrepreneurs are increasingly seeking such solutions to reach their next growth milestone. (read more…)

CATEGORY: alternative financing, debt, growth, VC

September 19, 2019 Chip Hazard, Flybridge : Venture Investor’s Playbook – Part 2: The Power-Law of Venture Returns

We asked Cambridge for what the top 10% looks like, and that’s where the data gets interesting. The 69 US early-stage investments that comprise Cambridge’s top 10% from 2009 (measured by total value as compared to invested capital, otherwise known as TVPI in the industry’s jargon) had a:

• Minimum TVPI: 5.6x (the cut off for the top 10% in the table above)
• Maximum TVPI: 254.9x
• Mean TVPI: 18.6x
• Median TVPI: 8.5x
• Weighted Average (by invested capital): 15.4x

So, in fact, it is not that the vast majority of industry returns come from the top 10%, as I said above, but really from the top 5% and from within that top 5%, there are likely less than 10 companies that returned more than 30x. In other words, the top 10% of the companies generated 57% of all returns for the investments made in 2009, and the top 25% of investments generated 85% of total returns. Another observation from the 2009 Cambridge data is that more than half the investments lost money. Losing half the time sounds terrible, and a lot of investors and fund managers spend an inordinate amount of time understanding their losses. However, as long as your losses are not outsized in dollar terms relative to the winners in your overall portfolio, they don’t matter as much as you’d think. As the old venture saying goes, you can only lose 1x your money. (read more…)

CATEGORY: VC, winner take all

August 8, 2019 Tom Tunguz : Which Categories of Seed Startups are Thriving? Which Aren’t?

Overall, the data is consistent with our observations on the ground. Many sectors have fallen out of favor, and others have risen suddenly. A contrarian might found a company in a deflating category; a counter-argument might be to ride the next big wave and start there. Whichever your perspective, the main conclusion is that there’s an incredible amount of opportunity. (read more…)

CATEGORY: capital, growth, VC

July 30, 2019 Version One Fund : Seven years into Fund I: charting the return multiples

1. Start-ups are incredibly tough. This is pretty obvious from the outcomes on the right side of the chart. Almost half of the portfolio companies sold for way less than what was invested and many couldn’t generate any pay-back. And as you can imagine, most of those losses happened relatively early in the life of the fund.
2. Venture capital clearly follows a power law in which outliers drive most of the returns. This is particularly true with seed-stage investing. In our case, we think that up to four companies in our Fund I portfolio could be fund makers (companies that can at least pay back the whole fund). Combined, they will probably drive more than 75% of the fund’s returns. Thanks to these outliers, our fund is tracking incredibly well and we are confident that the fund will end up producing at least a 4x return on invested capital (and possibly much more).
3. BUT…most of those returns are currently unrealized and the next three to four years will be about working with our entrepreneurs to turn paper returns into “real” returns.

(read more…)

CATEGORY: VC, winner take all

June 20, 2019 Alex Graham via Toptal : State of the Venture Capital Industry in 2019

1. There are fewer companies being funded.
2. Startups are raising larger rounds and staying private longer.
3. More growth and value upside is remaining inside private markets.
4. Rising numbers of “mega funds” are being raised to maintain private stakes.
5. Earned reputation allows the best funds to raise more and more access mature deals.

A quality > quantity, winner-take-all mentality has bid up valuations across all rounds. (read more…)

CATEGORY: growth, VC, winner take all

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

February 7, 2019 Sahil Lavingia via Medium : Reflecting on My Failure to Build a Billion-Dollar Company

But we were venture-funded, which was like playing a game of double-or-nothing. It’s euphoric when things are going your way–and suffocating when they’re not. And we weren’t doubling fast enough to raise the $15M+ Series B (the second major round of funding) we looked for to grow the team. (read more…)

CATEGORY: leadership, VC, winner take all