October 11, 2018 The Hustle : With 1/2 as many public companies as 20 years ago, normal investors are squeezed out

According to research from The Atlantic, there are half as many public companies listed on US stock exchanges today as there were in 1997. In other words, despite a few widely publicized IPOs, most companies rely on private investment to grow — creating a system where VCs can profit from the startup economy, but average investors cannot. (read more…)

CATEGORY: capital, winner take all

October 10, 2018 CNBC~ : Start-up economy is a ‘Ponzi scheme,’ says Chamath Palihapitiya

Chamath Palihapitiya, the outspoken Silicon Valley tech investor, called the start-up economy a charade on Wednesday, while also addressing the current the state of Social Capital, his embattled investment firm. "We are, make no mistake … in the middle of an enormous multivariate kind of Ponzi scheme," said Palihapitiya, at the Launch Scale conference in San Francisco. (read more…)

CATEGORY: risk, valuation, VC, winner take all

August 22, 2018 The Quantified VC : How to Win in Venture Capital: Focus on the Fat Tails

Since the track record of VCs is overwhelmingly skewed by a tiny handful of “unicorns,” entrepreneurs who try to assess the reputation of VCs by only looking at home-runs may get a skewed view. In good times, investors will be supportive. But how will they behave during bad times? Even great companies go through ups and downs. If your startup is not one of the big winners (which is likely, based on probabilities), how will your VCs behave? Will they abandon ship?—?or worse, will they turn negative or downright hostile? (read more…)

CATEGORY: risk, valuation, VC, winner take all

June 21, 2018 Collaborative Fund : Tails, You Win

Venture capital is a tail-driven business. You’ve likely heard that. Make 100 investments, and almost all of your return will come from five of them; most of your return from one or two. Correlation Ventures crunched the numbers. Out of 21,000 venture financings from 2004 to 2014, 65% lost money. Two and a half percent of investments made 10x-20x. One percent made more than 20x return. Half a percent – about 100 companies – earned 50x or more. That’s where the majority of the industry’s returns come from. It skews even more as you drill down. There’s been $482 billion of VC funding in the last ten years. The combined value of the ten largest venture-backed companies is $213 billion. So ten venture-backed companies are valued at half the industry’s deployed capital. (read more…)

CATEGORY: VC, winner take all

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

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

February 20, 2018 Alessandro Pluchino : Talent vs Luck: the role of randomness in success and failure

The largely dominant meritocratic paradigm of highly competitive Western cultures is rooted on the belief that success is due mainly, if not exclusively, to personal qualities such as talent, intelligence, skills, efforts or risk taking. Sometimes, we are willing to admit that a certain degree of luck could also play a role in achieving significant material success. But, as a matter of fact, it is rather common to underestimate the importance of external forces in individual successful stories. It is very well known that intelligence or talent exhibit a Gaussian distribution among the population, whereas the distribution of wealth - considered a proxy of success - follows typically a power law (Pareto law). (read more…)

CATEGORY: resilience, risk, winner take all

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