September 18, 2013 Todd Hixon via Forbes : Spring In Venture Capital
What we are seeing here is the end of a long, painful correction. The venture industry and the entrepreneurial world grew extremely fat in the late 1990s, when money was very easy, and it has taken almost 15 years for the surplus capital, funds, and companies from that era to exit or fade away. My old boss liked to say: “When everyone runs to one side of the boat, the other side will likely be drier”. Warren Buffett has a saying like this too. It’s very hard to call the exact bottom of a cycle. It’s reasonably possible to know when a sector has fallen far below its long-term norm and is due for recovery before long. That’s the way I see venture capital now. (read more…)
July 16, 2013 Felix Salmon via Reuters : Art, venture capital, and down-round phobia
Valuations go up and down, but no one likes to admit it; investors, in particular, love to delude themselves that the value of the company only went up after they bought in, and that they got a spectacular deal. Indeed, this is one of the reasons why so many startups fail: taking VC money is a deal whereby, in practice, if you don’t grow super-fast, in both size and valuation, then you will be left for dead. David Segal, on Sunday, had an intriguing piece about what you might call distressed startup opportunities, but that’s a very, very new market, and one which VCs aren’t yet interested in. (read more…)
July 16, 2013 Ben Horowitz from a16z : Capital Market Climate Change
If you are burning cash and running out of money, you are going to have to swallow your pride, face reality and raise money even if it hurts. Hoping that the fundraising climate will change before you die is a bad strategy because a dwindling cash balance will make it even more difficult to raise money than it already is, so even in a steady climate, your prospects will dim. You need to figure out how to stop the bleeding, as it is too late to prevent it from starting. Eating shit is horrible, but is far better than suicide. When you go to fundraise, you will need to consider the possibility of a valuation lower than the valuation of your last round, i.e., the dreaded down round. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Smart investors will want the founders and employees to be properly motivated post-financing, so there may be a way to a reasonable outcome for both you and your people. Make sure that you figure out what kind of deal is better than bankruptcy and be sure to communicate to both your existing and potential new investors what you think makes sense. In this situation, it’s better to start low and get one bidder that may lead to many and the market-clearing price than have no bidders and the dream of a high price. (read more…)
CATEGORY: downturn, leadership, profitability
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
April 12, 2009 Rassoul Yazdipour from California State University, Fresno : What can venture capitalists and entrepreneurs learn from behavioral economists?
In a nutshell, what this really means is that we as VCs and/or entrepreneurs may do all the sophisticated analyses, formal due diligences, and complicated evaluations and valuations on a given venture using our brain’s computer-like (rational) subsystem [...] we need to: a. Be at least aware of the inner working of our brain and get to know how in reality we as individuals arrive at a given judgment and choice; and b. Become aware of the main psychological traps and biases that continuously get turned on at and around our decision making times. We may not be fully capable of debiasing our choice process, but still this is much better than the alternative. (read more…)
CATEGORY: resilience, risk, VC
January 25, 2008 Millennium Technology Value Partners : Inside the Growing Secondary Market for Venture Capital Assets
For the last decade, secondary market activity involving all types of private equity investments has been a booming and increasingly efficient aspect of the far larger overall private equity market. Total secondary private equity transactions have grown 14-fold over the last ten years, from approximately $600 million in 1998 to well over $8 billion in 2007. A typical venture capital partnership is organized around a 10-year lifespan. During this ten year period many internal and external forces may intervene that can result in investors desiring earlier cash distributions. The vicissitudes of time and financial markets can also suggest critical changes in strategy or technology or sector focus are needed. For these reasons, investors—as well as venture capital fund managers themselves—are increasingly interested in tapping the secondary market for partial or complete exits earlier than seven years into an investment. (read more…)
CATEGORY: secondaries, VC
January 29, 2002 Credit Suisse First Boston : The Babe Ruth Effect: Frequency vs. Magnitude
The portfolio manager found himself in an unusual position. While his total portfolio performance was among the best in the group, he was among the worst based on this batting average. After having fired all of the other “poor” performing managers, the treasurer called a meeting with this portfolio manager to sort out the divergence between the good performance and the “bad” batting average. The portfolio manager’s explanation for the discrepancy underscores a lesson inherent in any probabilistic exercise: the frequency of correctness does not matter; it is the magnitude of correctness that matters. Say that you own four stocks, and that three of the stocks go down a bit but the fourth rises substantially. The portfolio will perform well even as the majority of the stocks decline (read more…)
CATEGORY: valuation, VC, winner take all
December 1, 1985 Journal of Business Venturing : The entrepreneur: A capable executive and more
This article discusses those traits that entrepreneurs exhibit at significantly different levels than do their corporate counterparts; how these factors may influence the decision to enter entrepreneurial occupations: and how these same traits have the propensity, if ignored, to have a negative influence on both the entrepreneur's organization and personal life-style. Entrepreneurs tend to be 1) tolerant of ambiguous situations, 2) prefer autonomy (autonomy may be described as self-reliance, dominance, and independence), 3) resist conformity, 4) be interpersonally aloof yet socially adroit, 5) enjoy risk-taking, 6) adapt readily to change, and 7) have a low need for support. These factors can lead to serious problems in delegation and communication, two factors of paramount importance to a growing concern. They may also cause intense stress or loneliness for the entrepreneur. Fortunately, the traits of willingness to accept change and ability to adapt to it will help the entrepreneur to accept and respond to problems that arise due to poor delegation or communication. Coping methods and a tolerance of ambiguity will assist the entrepreneur in dealing with stress and loneliness. The main problem is to alert the entrepreneur to the potentiality of these problems—which is what this article attempts to do. (read more…)
CATEGORY: leadership, resilience