August 4, 2020 Morgan Stanley : Public to Private Equity in the United States: A Long-Term Look
The dispersion between the best and worst funds is very high in venture capital relative to other asset classes (see exhibit 43). As we reviewed earlier, median returns to investors have been lackluster since 2000, but this hides the fact that top performing funds have generated very good returns. Identifying which funds are in the top quartile can be tricky. Indeed, more than one-quarter of all funds claim to be in the top quartile. The reason is that there are different ways to measure results, including various benchmarks, performance measures, and data sources. Outlook. The outlook for returns from U.S. venture capital in the aggregate, given investor commitments and fund investments, appears to be consistent with the recent past. The dispersion of returns within the asset class suggests that investors who have access to top tier funds will continue to earn very attractve returns. It also stands to reason that the large swell of investment in late-stage venture will earn lower returns than the smaller sum invested in early stage. (read more…)
August 3, 2020 The Hill : Revaluing venture capital
One of the strategies to address this issue has been to create “carve outs” or small allocations from big funds to invest in diverse fund manager and entrepreneurs. Institutions like Goldman Sachs have done just that. There are a few challenges with this model. First, most institutions have criteria that does not allow them to invest in first-time fund managers. In a world where only 14 percent of investment managers are female, with a significantly smaller number having run a fund before, how can we possibly widen the pool? Layered on top of this challenge is the financial burden it takes to get a fund up and running. Many managers have to forgo salary for at least a year while they are fundraising (and those are the lucky ones who even raise a fund). Very few women and minorities have this kind of capital cushion. In addition, fund managers have to commit 1 percent of the total fund size. So, if I raise a $50 million fund, I have to put in $500,000 of my own money. Potential investors base their diligence on how much “skin in the game” the managers have committed. I don’t have that kind of money, and I know many others in my position don’t either. These are meaningful technical issues that can and need to be addressed. But those technical issues are not the biggest hurdle. Women and minorities think differently; they run companies differently; they communicate differently, and they see opportunity in different places. In short, you can’t just put a woman or minority in the position and expect her to act like the traditional male investor or entrepreneur. To change the diversity of the industry we must be willing to embrace divergent cultural styles, different ways of communicating, and new ways of assessing market opportunities. (read more…)
CATEGORY: capital, leadership, VC
July 24, 2020 Josh Lerner and Ramana Nanda, Harvard Business School : Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn
Just how large a temptation the venture capital compensation scheme can pose is illustrated in the work of Metrick and Yasuda (2010), who show that of every $100 invested by the limited partners, over $23 end up in the pockets of the venture investors. These sums might not be disturbing if the very substantial payouts to each partner reflected even larger returns being made by the limited partners in the fund. But profit-sharing is not the most important source of compensation. Instead, almost two-thirds of the income (in time-adjusted dollars) is coming from the venture capital management fees, which remain fixed whether the fund does well or poorly. These incentives clearly may motivate groups to add capital in excess of the growth of partners, even if performance suffers somewhat. (read more…)
July 6, 2020 Avi Eyal via Medium : Burn Baby, Burn
Revenue often costs too much. One will often face a tradeoff between cash flow paid annually at a discount and higher revenues from customers. Revenue is Vanity, Profit is Sanity …. and Cash is Reality! Cash upfront helps fuel growth which has a multiplier effect — especially if the business has high gross margins. (read more…)
CATEGORY: customer acquisition, growth, profitability
June 25, 2020 Fred Wilson : Board Diversity
Ten years ago the tech/startup/venture industries started to make gender balance a priority in management teams, boards, and the venture capital industry. While we are not where we need to be, we have made good progress. We can do the same with diversity across the board. We can use the same approaches and the same persistent approach to the issue. (read more…)
CATEGORY: leadership, VC
June 16, 2020 Allen Miller via Medium : The Return of Capital Efficiency
Capital efficiency has long been a desirable trait in early/growth stage businesses. But over the last few years, an abundance of capital combined with a “growth at all cost” mindset, allowed founders to deprioritize efficiency. Ignoring efficiency, however, can lead to making cardinal mistakes like misreading true product-market-fit, over-hiring for the stage you are in and burning through too much money too quickly. Furthermore, growth rate and top-line progress are a function of how much capital a business has consumed to get to that point (i.e. getting to $10M in revenue is less impressive if you spent $50M to get there vs spending $5M to get there.) (read more…)
CATEGORY: customer acquisition, growth, product-market fit
June 14, 2020 Jennifer Alsever via Medium : Indie vc: Unicorns Are Out, Profits Are In
But the model is now proving prescient. Over five years, Indie.vc has backed 34 companies — half of which are women-led companies and 20% are Black. And while there haven’t been any big exits yet, the companies that receive Indie.vc funding seem to be much more robust than their peers, especially in a challenging economic climate. On average, they’re growing 100% in the first year, and 300% the second year, says Roberts. Plus, the fund’s mortality rate is 10% — compared to about 44% with traditional VC-backed companies. (read more…)
CATEGORY: customer acquisition, growth, valuation
May 18, 2020 The Verge : A pizzeria owner made money buying his own $24 pizzas from DoorDash for $16
The answer isn’t clear because we’re very far from the old ways. By the magic of venture capital, some businesses don’t have to make money to survive. And that’s upended things for everyone. “Third-party delivery platforms, as they’ve been built, just seem like the wrong model, but instead of testing, failing, and evolving, they’ve been subsidized into market dominance,” as Roy puts it. “The more I learn about food delivery platforms, as they exist today, I wonder if we’ve managed to watch an entire industry evolve artificially and incorrectly.” (read more…)
CATEGORY: capital, profitability, VC
May 15, 2020 Crunchbase : Why Startups Should Become ‘Camels’ – Not Unicorns – During COVID-19
While head-spinning valuations make for great headlines, challenges facing the tech economy indicated a shift in this “growth at all costs” mindset for a while. With economic uncertainty looming, the shift accelerated, and it’s no surprise as startups look to how they can survive an increasingly likely drought. Soon, unicorns will become myths once more as we see the rise of the “camel.” (read more…)
CATEGORY: downturn, resilience, risk
April 27, 2020 Tech Crunch : Indie.vc founder Bryce Roberts: Profitability is ‘more achievable than a Series A round’
“Genuinely, it’s not rocket science,” he says. “Profitability isn’t this crazy, elusive thing. It’s literally more achievable thana Series A round. It’s way more achievable than a Series B round. If you look at the kind of fall-off between those rounds, most entrepreneurs would be better off finding their path to profitability and scale.” (read more…)
CATEGORY: capital, profitability, VC