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IMHO: Venture capital has its own rules. Rule 1: Find a startup with traction significantly large and growing rapidly in a huge market and where, still, the
by graycat 11y ago
IMHO: Venture capital has its own rules.
Rule 1: Find a startup with
traction significantly large and
growing rapidly in a huge market
and where, still, the founders are
very short on cash and will sign
a term sheet with some really onerous
conditions. E.g., the founders suddenly
go from owning 100% to owning 0% and
may get back to 60% on a four year
vesting schedule. The BoD, dominated
by the venture capital partners, can
fire the founders before their stock
is vested.
Rule 2: Claim a lot of items on a long
list of what venture capital is about
other than Rule 1. Claim it's about
technology, innovation, brilliant founders,
great leaders, changing the world,
with the venture firm helping by
using their long experience, "deep
domain knowledge", etc.
Rule 2 is 100% noise, just
misdirection, to keep
people from noticing Rule 1.
Other major parts of our society are
really good at innovation, creating it,
evaluating it, exploiting it, etc.,
but not the venture capital firms.
They won't evaluate innovations.
Instead, again, they just
follow the two rules.
As in the title, "better ideas"? The
venture firms never consider the
quality of the ideas -- instead, they
just follow Rules 1 and 2. Or,
on evaluating the ideas, they just
let the market decide and then
look at traction to see what the
market has decided.
Sometimes they make a lot of money,
but on average their returns are poor.
- nekopa 11y agoAre VC returns really poor on average? I thought their hit rate (1 company out of 50 being successful) was poor, but their returns are stellar because of the few unicorns. If your conclusion is correct, how are the VCs staying in business?
- didgeoridoo 11y agoThe trailing 10-year average of VC returns is approximately the same as the S&P, but with orders of magnitude more volatility. http://www.inc.com/kimberly-weisul/venture-capital-funds-make-decent-money-this-is-news.html http://www.inc.com/kimberly-weisul/venture-capital-funds-mak...
- graycat 11y agoData on average venture returns is at: http://www.avc.com/a_vc/2013/02/venture-capital-returns.html#disqus_thread http://www.avc.com/a_vc/2013/02/venture-capital-returns.html... http://www.kauffman.org/newsroom/2012/07/institutional-limited-partners-must-accept-blame-for-poor-longterm-returns-from-venture-capital-says-new-kauffman-report http://www.kauffman.org/newsroom/2012/07/institutional-limit... Net, on average, the returns are poor. > If your conclusion is correct, how are the VCs staying in business? Reasons: (1) The money comes from the limited partners (LPs), and they are heavily investors with big bucks. We're talking billions, from university endowments, state pension funds, sovereign wealth funds (say, a fund run by a rich Mideast oil country), some family wealth funds, maybe some insurance companies, maybe some hedge funds. Of course, venture might hit a grand slam with great returns, and no doubt each venture firm that raises money from LPs claims that they are a top tier firm with great advantages and some great investment themes that with their "deep domain knowledge" and great business experience and insight will let them get much better than average returns. These limited partners invest billions in all good looking asset classes. Venture capital is regarded by the LPs as an asset class but is relatively small. So, for the limited partners, venture capital is small potatoes and slips in under the wire even if on average the returns have been poor. (2) The LPs have FMO -- fear of missing out. Due to the rapid progress of technology, the Internet, etc., the venture firms can keep telling the LPs that "This time it's different." with some possibility of being correct. So, some portfolio manager at an LP doesn't want to have to answer why they didn't invest in KPCB or Sequoia and, thus, missed out on Google. (3) The LPs are not good at technology or able to evaluate "ideas" or look for "better" ideas. Instead, the LPs are closer to traditional commercial bank lending and private equity that put a lot of weight on accounting statements and don't expect to evaluate ideas or technology. So, the LPs are not pushing their venture firms to evaluate "ideas".
- paulkon 11y agoVC firms should have increased regulation to decrease anti-competitive rigged bidding behavior.
- danieltillett 11y agoAssuming you are correct then it should be possible to fool VCs by creating products that achieve traction using the age old trick of selling a dollar for 90c. I am sure they would never fall for this.
- w1ntermute 11y ago> I am sure they would never fall for this. I hope that is sarcasm: https://en.wikipedia.org/wiki/Groupon#Business_model https://en.wikipedia.org/wiki/Groupon#Business_model
- danieltillett 11y agoSometimes I am a bit too subtle :) I suspect the real business model for most of these high-growth-without-a-plan-to-make-a-profit businesses is really eyeball exhaustion. The big players like google and facebook can monetize eyeballs, but they can only do this if they have people on their platforms. A loss making business can grab enough eyeballs that they will significantly affect the bottom line of the large players. The large players have to respond by buying up these startups and shutting them down. As long as the VCs don’t back too many of these types of startups then it should be quite an effective way to shakedown the large players.
- graycat 11y agoSure, in selling a dollar for 90 cents, lose 10 cents. But, but, but, they plan to make it up on the volume!