December 21, 2020 Tech Crunch : Silicon Valley should reward zebras, not unicorns
Unicorns thrive so long as they remain in the enchanted forest of endless venture rounds; zebras tough it out in the savannas of the free market. A zebra company won’t become the next behemoth like Facebook or Amazon, but neither will it become the next Quibi or WeWork. One-way extraction of value is replaced with a circular flow of value. Exponential growth is neither the best nor the only way for businesses to operate. (read more…)
CATEGORY: bootstrap, leadership, resilience
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
December 1, 2020 National Bureau of Economic Research : Hidden in Plain Sight: Venture Growth with or without Venture Capital
In our matched sample estimates, VC funded firms are 6 times more likely to grow than non-VC-funded firms of comparable quality. Furthermore, when we focus on the right tail of the estimated VC Likelihood distribution, the ‘VC-effect’ is substantially reduced: firms in the top 0.05% of our quality measure at birth, are only 2.3 times more likely to grow with VC funding than without it. (read more…)
November 23, 2020 Charles Duhigg via the New Yorker : How Venture Capitalists Are Deforming Capitalism
Whereas venture capitalists like Tom Perkins once prided themselves on installing good governance and closely monitoring companies, V.C.s today are more likely to encourage entrepreneurs’ undisciplined eccentricities. Masayoshi Son, the SoftBank venture capitalist who promised WeWork $4.4 billion after less than twenty minutes, embodies this approach. In 2016, he began raising a hundred-billion-dollar Vision Fund, the largest pool of money ever devoted to venture-capital investment. “Masa decided to deliberately inject cocaine into the bloodstream of these young companies,” a former SoftBank senior executive said. “You approach an entrepreneur and say, ‘Hey, either take a billion dollars from me right now, or I’ll give it to your competitor and you’ll go out of business.’ ” This strategy might sound reckless, but it has paid off handsomely for Son. (read more…)
CATEGORY: leadership, risk, VC
November 23, 2020 Jerry Neumann : Productive Uncertainty
Uncertainty, generally, is something to be avoided. If you can’t predict the outcomes of your actions you will have a hard time planning and managing. And if others see that your business proposition is uncertain they will shy away from including your product in their plans. But uncertainty can also shield against competition, allowing you to create excess value. If it does, it is productive uncertainty. Innovations, because they are new, usually come with uncertainties of one sort or another. Founders have to choose the subset of innovations where the uncertainty is productive to have the best chance of succeeding. (read more…)
CATEGORY: growth, product-market fit
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
September 30, 2020 Harvard Business Review : What’s Next for Silicon Valley?
Over the last 20 years, Silicon Valley has benefited from a once-in-a-lifetime alignment of advantages. American primacy, the ubiquity of cheap capital, the arrival of the smartphone (among other widely adopted tech innovations), and, perhaps most significantly, a benign regulatory environment have all conspired to create a historic concentration of wealth and power. The titans of the Valley and their heirs have been free to roam far ahead of lawmakers, watchdogs, and tax codes. That might not be true for much longer, however. Despite the fact that many public tech companies saw their valuations skyrocket during the lockdown and that the Covid-19 pandemic has accelerated mass adoption in e-commerce, online payments, telemedicine, and video conferencing, there are signs that the gilded age for consumer internet businesses may be drawing to a close. (read more…)
September 29, 2020 Institutional Investor : The Pervasive, Head-Scratching, Risk- Exploding Problem With Venture Capital
Is venture capital a risky asset class? No. Most VC funds choose to act in a risky manner by not diversifying, but that does not make the asset class risky. To de-risk venture capital, CIOs simply need to acknowledge that VC math is different from public markets math. The importance of low-probability, excess-return-generating investments means that proper diversification requires a portfolio of at least 500 startups. It will take work to assemble such a portfolio. It is hard to do by investing directly. Current funds and funds-of-funds are rarely designed with diversification in mind. Instead, they concentrate funding in a small subset of ultra-popular entrepreneurs, sectors, and geographies, which risks driving down returns on capital, leaving higher-return strategies underfunded. So why are funds reluctant to offer such diversification? There are no rewards for diversification as a venture GP. Today’s investors flock to top-quartile managers, who must act in a risky manner to overachieve. Such GPs often insist that their portfolios must stay small to “not dilute their winners.” In other words, they rely on picking winners, but inadvertently admit to not being able to do so consistently. Managers who reduce risk by diversifying will, by definition, at best achieve second-quartile returns. Only the top quartile is rewarded, through performance and management fees on larger follow-on funds. Given the ten-plus-year life of each fund, and the way capital floods to proven winners, it is economically rational for a GP to take a risk at getting lucky with an undiversified fund rather than diversifying — knowing that diversifying would result in fewer if any rewards. This is especially true since most GPs show signs of overconfidence about their abilities, and trust that they will outperform, believing it will happen through skill, not luck. (read more…)
September 21, 2020 Andrew Lee via Medium : How To Tell If You’re Running A Zombie Startup And How to Revive It From The Dead
What’s the potential solution to the problems you’ve identified? Don’t dismiss the solution if it initially seems small, trivial, or hacked together. Most great startups start small and build toward a grander solution. The best ideas or solutions aim to be uniquely obvious as opposed to being obviously unique. In hindsight, people should be saying how stupidly obvious your solution was. The elegance of simplicity is hard to capture here so, you’ll need to do the work to find inspiration. (read more…)
CATEGORY: leadership, product-market fit
September 17, 2020 Alex Danco : Are Founders Allowed to Lie?
Founders use this soft power to their advantage. When blessed by their VCs, they are uniquely permitted to “pre-tell” the truth in a way that no one else is allowed to do, so long as they observe all of the unwritten rules in doing so. You can’t push it too much; you can only push it in certain ways and not others; and most importantly, you must genuinely do so in an effort to bootstrap the future into existence. You’re not misleading investors; your investors get it: they’re optimizing for authenticity over ‘fact-fulness’. It’s not fraud. It’s just jump starting a battery, that’s all. You’ve all seen this. It doesn’t look like much; the overly optimistic promises, the “our tech is scaling nicely” head fakes, the logo pages of enterprise customers (whose actual contract status might be somewhat questionable), maybe some slightly fudged licenses to sell insurance in the state of California. It’s not so different from Gates and Allen starting Microsoft with a bit of misdirection. It comes true in time; by the next round, for sure. (read more…)
CATEGORY: leadership, VC