Category: winner take all
June 28, 2017 Jonathan Lu via Medium : Is there a new beginning for distressed VC-backed companies?
If you want to hit home runs, you’re going to strike out a lot too — they don’t call it venture for nothing, just like options trading the name of the game is risk. While the lure of the top 1% draws in the dreamers, and the ire at the bottom 1% draws equal media attention, as Thomas Piketty described in Capital in the Twenty First Century, the incentives of capital investment mean that this is exactly how the game is played. (read more…)
CATEGORY: risk, VC, winner take all
June 20, 2017 Toptal : 3 Core Principles of Venture Capital Portfolio Strategy
It is absolutely critical to understand that the vast majority of a fund’s return will be generated by a very few number of companies in the portfolio. This has two very important implications for day-to-day activities as a venture investor:
- Failed investments don’t matter.
- Every investment you make needs to have the potential to be a home run.
CATEGORY: capital, VC, winner take all
December 17, 2016 Samuel Gil via Medium : Meaningful VC Exits
Some VCs will only aim at potential home-runs, knowing that some of those investments will most likely end up being “just” meaningful exits, and some VCs will mainly aim at potential meaningful exits, expecting that 1 or 2 of those investments will end up being home-runs (read more…)
CATEGORY: capital, VC, winner take all
November 1, 2015 Cambridge Associates : Venture Capital Disrupts Itself: Breaking the Concentration Curse
For the 18 years covered by this analysis, the top 100 investments accounted for a percentage of total value creation that ranged from a minimum of 72% in 2012 to a maximum of over 100% across several years, making this a robust data set to analyze (our methodology is described in the sidebar). The top 100 deals’ total gains outstripped the total gains of the asset class in each of the years that marked the dotcom crash (1999 to 2003) and in 2005 and 2006 (Figure 1). This fact was particularly salient in 2000, when the asset class as a whole generated a net loss, while the top 100 showed a gain, as well as in 2001, when the total gains of the top 100 accounted for 217% of the asset class’s gains. (read more…)
CATEGORY: VC, winner take all
June 25, 2015 Jerry Neumann : Power Laws in Venture
The professional innovation community takes it as a given that venture returns are power-law distributed. In Peter Thiel’s class at Stanford he said “…actual returns are incredibly skewed. The more a VC understands this skew pattern, the better the VC. Bad VCs tend to think the dashed line is flat, i.e. that all companies are created equal, and some just fail, spin wheels, or grow. In reality you get a power law distribution.” (read more…)
CATEGORY: resilience, VC, winner take all
June 8, 2015 Chris Dixon from A16z : Performance Data and the ‘Babe Ruth’ Effect in Venture Capital
“How to hit home runs: I swing as hard as I can, and I try to swing right through the ball… The harder you grip the bat, the more you can swing it through the ball, and the farther the ball will go. I swing big, with everything I’ve got. I hit big or I miss big.” –Babe Ruth One of the hardest concepts to internalize for those new to VC is what is known as the “Babe Ruth effect” (read more…)
CATEGORY: valuation, VC, winner take all
November 12, 2014 Fenwick & West : Silicon Valley Venture Survey – Third Quarter 2014
Distribution of Venture Returns. It is well known that venture investing is a very risky business, with the key to success often being the one investment that provides a huge return to offset the numerous money losing or small return investments in a fund. (read more…)
CATEGORY: risk, VC, winner take all
May 7, 2012 Kauffman Foundation : We Have Met the Enemy…and He is Us: Lessons from Twenty Years of the Kauffman Foundation’s Investments in Venture Capital Funds and the Triumph of Hope Over Experience
VC returns haven’t significantly outperformed the public market since the late 1990s and, since 1997, less cash has been returned to investors than has been invested in VC. Our research suggests that investors like us succumb time and again to narrative fallacies, a well-studied behavioral finance bias. (read more…)
CATEGORY: capital, VC, winner take all
April 26, 2012 Blake Masters : Peter Thiel’s CS183: Startup – Class 7 Notes Essay
An example will help clarify. If you look at Founders Fund’s 2005 fund, the best investment ended up being worth about as much as all the rest combined. And the investment in the second best company was about as valuable as number three through the rest. This same dynamic generally held true throughout the fund. This is the power law distribution in practice. To a first approximation, a VC portfolio will only make money if your best company investment ends up being worth more than your whole fund. In practice, it’s quite hard to be profitable as a VC if you don’t get to those numbers. (read more…)
CATEGORY: VC, winner take all
December 3, 2010 Harvard Business Review : Risk & Reward in Venture Capital
This note describes the payoff structure of investment in individual venture capital-backed companies and in venture capital portfolios. Venture Capital investments are characterized by high failure rate (Over 50%) and a small number of given successes (greater than 10% returns). As an asset, class, venture capital has produced high cyclical returns that mirror trends in capital markets and in markets for new technology. There is a large disparity in median and upper quantize performance. A small number of funds do well on a constant basis. Overall returns on venture capital have been low for the decade ending in 2009. (read more…)
CATEGORY: VC, winner take all