August 16, 2023 Superfluid : Why Mega Funds Exist

In 2013, the top decile threshold is 3.58x, meaning for every $1 invested, the best 2013 vintage funds, returned at least $3.58 back, if not more. As you can see, the disparity in TVPI between the top decile and the median is quite substantial between 2013 - 2016. (read more…)

CATEGORY: VC, winner take all

July 26, 2023 RAISE : The Hunt for Unicorn Managers

Is a 10x fund as rare as a unicorn? And what does the data say a savvy investor should look out for when seeking this elusive 10x TVPI fund?  We collected a deep trove of information about fund performance from 656 funds: out of these selected funds, a mere five are presently marked at Total Value to Paid In capital (TVPI) of 10x or more, with the highest fund tipping the scale at a robust 33x. Of the 656 funds analyzed, just twelve currently surpass a 7x Net TVPI, a slim 1.8% of all applicants for the RAISE Global Summit.  If an investor wants to find a unicorn, they should probably focus on Fund I. Of the twelve in our dataset, nine sprouted from a Fund I, with only three coming from a Fund II. It's notable that unicorns generally are very small funds. Out of the twelve unicorns, only two funds exceeded $20M. The majority of these unicorns raised less $10M, indicating that these are starter funds. (read more…)

CATEGORY: VC, winner take all

December 16, 2022 David Friedberg on All-In Podcast : State of the Markets

"What happens to the bottom 75% of Venture Firms. It's such a staggering demonstration of what people call the power law, which is how excess returns accumulate to a minority of investments. The market cap of 43% of companies that have gone public since 2020 is $750B. The market cap of the other 300 companies is only $26B. The cash that went into the $750B is $136B, and the cash that went into the $26B is $107B. And so the cash that went in to generate that $26B, that $107B, that's your bottom 50%.  And the top 50% put in $136B to make $750B. And I think it gets even narrower as you move into that top quartile. And this is only the companies that went public, so this is only of the top companies and the top funds that were actually able to IPO. So it highlights how much of a power law actually plays through. The bottom 75% or the bottom 50% of various fund vintages is below 1.0. They lose money for their LPs consistently. It's a cycle, and so the next generation comes through and LPs make a portfolio of bets, and they hope that they make enough bets in the right VCs that their portfolio generates greater than market returns, greater than 15-20%." (read more…)

CATEGORY: capital, VC, winner take all

November 15, 2021 Fred Wilson : Seed Rounds At $100mm Post Money

So, in a world where we are seeing more and more $100mm valued seed rounds, one has to ask the question what are the investors expecting? A $100 billion outcome? Doubtful. Less dilution, maybe. A different power-law distribution? Don’t count on it. I think they are being delusional, comforted by the likelihood that someone will come along and pay a higher price in the next round. But it seems that person may also be delusional. Because when you model things out, the numbers just don’t add up. The exit values in VC have increased significantly over the last decade leading to escalating entry values. That makes sense. But the two things that have not changed materially over the last decade are the dilution from seed to exit and the power-law distribution of outcomes in an early stage portfolio. (read more…)

CATEGORY: capital, VC, winner take all

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

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

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

March 9, 2020 Maya Kosoff via Medium : Why All the Warby Parker Clones Are Now Imploding

Perhaps the original mistake of the DTCs wasn’t in their vision, but in their decision to take the venture capital in the first place. Now under pressure to grow even faster and at greater scale than they otherwise would have had to naturally, they are being confronted with what happens when growth slows down, the cash starts running out, and investors are expecting their returns. (read more…)

CATEGORY: customer acquisition, growth, product-market fit, winner take all

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