May 29, 2018 Clint Korver, Ulu Ventures : Picking Winners is a Myth, but the Power Law is Not

In short, VCs cannot reliably pick winners. They can, however, construct portfolios that consistently generate great returns. Simply stated, more investments give a venture firm better odds of investing in an outlier company that can make a fund. However, there are limits. Portfolio construction requires weighing the benefits of diversification against a VC’s ability to generate and support high-quality investments. Striking the right balance separates great VCs from the rest. (read more…)

CATEGORY: risk, VC, winner take all

May 16, 2018 Kevin Roose, New York Times : The Entire Economy Is MoviePass Now. Enjoy It While You Can

The new way to make it in business is to spend big, grow fast and use Kilimanjaro-size piles of investor cash to subsidize your losses, with a plan to become profitable somewhere down the road. (read more…)

CATEGORY: customer acquisition, growth, valuation, VC

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

March 5, 2018 Eric Paley via Tech Crunch : When venture capital becomes vanity capital

I’ve written a lot about the benefits of efficient entrepreneurship. I’ve explained my view conceptually, tried to illustrate the mechanics of how excess capital kills promising companies, and shared data from 71 IPOs that demonstrates that even in success, more capital raised is not correlated with better outcomes. Just in case all of that was too conceptual, this blog post is designed to appeal to another emotion—greed.  Raising less money or money later doesn’t just lead to better companies, it leads to richer founders. (read more…)

CATEGORY: leadership, valuation, VC

January 11, 2018 Luke Kanies via Medium : Venture Capital Is Ripe For Disruption

By comparison, today’s system looks stable. (Although, in this case, looks are deceiving.) There are hundreds of seed and venture funds, all following the same playbook: Try to get their investments to the magic number of $1 million in annual recurring revenue (ARR), raise an A round of funding, and keep on the funding train until you go public or go bust. There’s so much pattern matching going on that founders are contorting their companies to fit the funding schedule rather than discovering their own destinies. (read more…)

CATEGORY: alternative financing, capital, VC

January 9, 2018 Pitchbook : A Dynamite Year for VC

In 2017, record-breaking fund sizes and unprecedented levels of dry powder gave rise to mega-deals and dramatic shifts in the exit market.  Outsized funds spark outsized deals.  Driven by strong VC fundraising and non-traditional investor activity, capital invested reached the highest levels in over a decade while deal volume dropped.  The result?  Fewer, but larger, deals. (read more…)

CATEGORY: growth, VC, 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 22, 2017 Bryce Roberts via Medium : Where There’s Smoke There’s Fire

The largest VCs have made their bets early, so funding slows for fast followers. Timelines for user growth take longer than anticipated. Revenue comes harder and less profitably than planned. New competition continues to get funded, albeit from less well known funding sources. Then, the category starts to feel and look and actually be overfunded.  Enter the next shiny thing. (read more…)

CATEGORY: resilience, 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