12 ms·

Losing Money

260 points by ghosh 11y ago

colinbartlett 11y ago
It would be awesome to see a list of the winning companies and the approximate multiple on invested capital returned for each of them, along with which companies fizzled out. Not expecting to ever see that, but it would be interesting to learn which ones they thought would be huge successes and what the eventuality was.
- eastdakota 11y ago
  USV's 2004 fund invested in Twitter, Tumblr, Indeed, Etsy, and Zynga. Those likely represent the 5 double-digit return multiples Fred references. It was an astonishingly good fund — certainly among the best of its vintage and perhaps among the best of all time.
  - vram22 11y ago
    Indeed.com sold for around $1 billion, or so I heard from a startup founder that I did some consulting work for (he was in the recruitment space too, and had a prior exit or two). Later googled for that info and saw links that looked like it was true. A Japanese company recruiter.com bought it. Interestingly, I don't remember reading about the Indeed sale on Fred's blog, though I've been reading it for some years now. Could have missed the post, or could be he never wrote about it. Edit: grammar.
    - mikeyouse 11y ago
      http://avc.com/2012/09/indeed/ http://avc.com/2012/09/indeed/ > Indeed has always been the quiet one. Nobody really talks about them. But as I have said a number of times on this blog, they are the most complete company in our portfolio. They have it all. Two world class entrepreneurs as founders. A solid management team all up and down the company. A product that is beloved and services more than 80mm people worldwide every month. An engineering team that has kept the service up with literally no down time that I can ever remember. A business model that, like Google's, is the best on the Internet. Revenues, profits, customer satisfaction, shareholder value. They built a fortress and I am just so happy to have had a front row seat watching them build it.
      - vram22 11y ago
        Ah, thanks, obligado.
      - vram22 11y ago
        Also, just saw at the AVC link you posted, this: http://avc.com/2012/09/indeed/#comment-662213687 http://avc.com/2012/09/indeed/#comment-662213687 Indeed used Lucene.
db1 11y ago
I raised a small seed round (200k) on my first company. At that time I felt like it was a staggering amount of money. The company didn't work and out we pretty much lost all of it. For the longest time, I felt really guilty about how I had lost my investors money. I have a little more perspective now and realize that it was practically insignificant to my investor. Ah well.
- buro9 11y ago
  It is indeed comforting. We lost our investors 150k GBP, and I've been feeling guilty about that. Investors invest what they can afford to lose.
- tedmiston 11y ago
  I think there's a similar founder guilt when founders go through an accelerator, but their company doesn't work out.
- vthallam 11y ago
  Tough luck! I have never raised funds and planning to raise funds soon, but back of mind, i do have fear of losing the investors money. I think the founders should get over this guilt as long as they were lean and did everything they could to save the company. Btw, How did your investors respond when it didn't work out?
  - db1 11y ago
    Things actually worked out okay. We had a sit down and amicably decided to wind things down. So I guess it hit me hard, but really was not a big deal to my investor.
- brianwawok 11y ago
  Honestly I think it is good to feel guilty. If you felt 0 guilt and just shrugged, I think it would make you seem a little bit of a irresponsible sociopath. Now obviously don't live in a basement for 6 months because of your sadness, it was an investment that they could afford to lose ;) But I think it normal / expected to feel sad/guilty when you let someone down...
sakri 11y ago
Why does he use mm ($25mm)?
- bryanlarsen 11y ago
  'M' is the roman numeral for thousand, so 25m traditionally means 25000. mm is thousand thousand, aka million.
  - xentronium 11y ago
    That notation doesn't really make much sense though, since MM is roman for two thousand.
    - IshKebab 11y ago
      Yeah and also literally no-one says "25M" when they mean 25000.
  - zeeZ 11y ago
    And SI uses 'M' as a prefix for one million. Oxford defines 'm' as million(s) in a money context, Merriam-Webster includes 'M' as an abbreviation of million. It seems odd that anyone would think $25m should be read as $25000. It's much more likely that I would read $25mm as 25 millimeters instead.
    - bryanlarsen 11y ago
      The problem is that there are multiple traditional usages, with overlapping meanings. Capital M has traditionally stood for both thousand and million. In other words $20M and $20m is ambiguous, depending on what tradition you come from. $20MM and $20MM and $20k are not ambiguous.
  - colinbartlett 11y ago
    I believe the traditional usage requires capital M: $20M = $20,000 $6MM = $6,000,000 Of course, it's more common now to use lowercase k: $30k = $30,000
karterk 11y ago
This also explains why VCs look to fund billion dollar opportunities even if they look a little risky. VCs are in the game for big exits and that's how the math works out. Something to keep in mind when you're planning to raise money.
- 90002 11y ago
  I think entrepreneurs often forget that VC's are deploying OPM, which puts an enormous amount of pressure on the firm to deliver outsized returns. I've met a few entrepreneurs over the years that fail to understand this fully - sad!
  - tedmiston 11y ago
    Other People's Money Ah. http://www.bmecapital.com/Common_Practices.html http://www.bmecapital.com/Common_Practices.html
tedmiston 11y ago
Is there a technical meaning when he refers to fund years as "2008 vintage" vs. just "2008"?
- joncrocks 11y ago
  Not beyond what you'd probably assume it to mean... http://www.investopedia.com/terms/v/vintage_year.asp http://www.investopedia.com/terms/v/vintage_year.asp
  - tedmiston 11y ago
    So, the idea: is "compare this fund against others that were started in economic conditions like 2008", not say 2006 or 2012. Does that seem right?
    - taylorwc 11y ago
      Yes exactly. Like cohort analysis for venture funds. Compare them to peers that had experienced the same macro trends and conditions.
- adewinter 11y ago
  I suspect it's more of a pompous thing. Thinking of the funds like wines: they mature/get better with age.
  - taylorwc 11y ago
    It's not really pompous. Fund 'vintage' is the way that VC firm partners (GP's) have to orient their thinking because it's how their investors (LP's) measure the success of a particular investment in their firm. The term vintage has been standard fare in this world for a long time, even if it draws its roots elsewhere... See also: 'carried interest'[0], which draws its origin from shipping centuries ago. [0] https://en.wikipedia.org/wiki/Carried_interest https://en.wikipedia.org/wiki/Carried_interest
- debacle 11y ago
homero 11y ago
Good thing he's got bitcoin to fall back on when the vc bubble pops
tedmiston 11y ago
Peter Thiel in Zero to One: > The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined. > This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.
- ssharp 11y ago
  Do most VC's think this way and is this actually a "rule", meaning it's the way you succeed? I'd think VC investing is like most other types of investing where you can take on different strategies depending on your goal. Some investors will take large risk in order for large reward, where other investors would rather take lower risk for a higher probability of some positive return.
  - supster 11y ago
    Yeah I feel that tends to play out based on what class of VC you are. E.g. seed/angels -> high risk / big portfolio (100s startups) / huge win-loss multiples (but invest small $) traditional VCs/Seed A-C -> medium risk / moderate portfolio size (10s) / medium win-loss multiples (but invest medium $$) growth private equity -> small risk / small portfolio (singles) / small win-loss multiples (but invest huge $$$) Of course the divisions are arbitrary and some investors put money in all categories, but I feel like the above holds true in general.
  - karmacondon 11y ago
    I think it's a "rule" as opposed to a strategy like "don't sacrifice your pieces in exchange for nothing" is a rule in chess. It's possible to succeed without following that guide line, but it's very difficult. VC firms produce modest returns for a very high risk. You've probably only heard of one out every hundred companies that have been venture funded. Low risk investments just don't produce enough return.
  - 11y ago
sz4kerto 11y ago
Note: Ben Graham wrote about all these decades ago. (It doesn't make this article less true, etc. -- just if you're interested in these basic rules of investing, then read 'The Intelligent Investor'.)
- ghshephard 11y ago
  I thought Ben Graham, and the Intelligent Investor, was the absolute antithesis of high risk Venture Capital. From the introduction to that book: "Our text is directed to investors as distinguished from speculators, and our first task will be to clarify and emphasize this now all but forgotten distinction. We may say at the outset that this is not a “how to make a million” book. " and " “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”" Fred Wilson is in a very, very different space then Ban Graham was discussing in the Intelligent Investor.
  - dbcurtis 11y ago
    They are both speculators, just different time horizon. My epiphany came when a few years ago I had a conversation with a friend who is a brewmeister and restaurant manager for properties owned by his family's trust. (If you live on the Peninsula, you have probably had his beer.) His grandfather had set up a trust in order to pass his Monterey-area produce farm to his children, and the trust and farm are still going, and growing. My friend mentioned he was spending the weekend at a family retreat with some of his siblings and cousins that were the current trust management. The topic for the retreat was identifying which of "the cousins" (the pre-teen and teenage children of the next generation) were likely to be future manager-trustees, and which were likely to be passive trustees. The goal being to start identifying and grooming the next generation of management. So my definition of investor: If you are managing the asset with the intention that someday your as-yet unborn grandchildren will be taking over and managing the asset, you are an investor. All else is speculation, just on various time horizons. An investor is never looking for liquidity, ever -- only speculators expect to turn an asset into cash in the foreseeable future.
baccredited 11y ago
I'll summarize: Many startups fail. Don’t throw good money after bad.
dataker 11y ago
Why would anyone feel guilty about losing money from a VC? In the end, it's a venture capital FUND: risk and return are inherent to this. It's not the VC's money, but a collection of GPs (themselves have thousands of individual investors). Your loss is already accounted for in their portfolio. Otherwise, they're not doing it right.
- taylorwc 11y ago
  Have you ever taken money from outside investors? It doesn't really matter whether the investor expects loss or at least is aware of the risk. Losing other people's money when they took a bet on you is a miserable feeling. Add it on to the list of things that can keep you awake at night when you're a founder or startup exec.
  - dataker 11y ago
    No I haven't, but I have money on companies. Many things can happen (disease, conflict, competition,etc) and I surely won't make a founder feel terrible about himself because of that. Instead, I pick someone with a different personality, industry and network that is able to balance my risk.
    - taylorwc 11y ago
      I applaud that you would never try to make a founder feel terrible intentionally. That said, most founders end up struggling with those feelings regardless. It's an awful feeling, even if you know your investors understand that there is huge risk and don't demand a guaranteed home run (not that there is such a thing).
- brianwawok 11y ago
  See my other comment. I think you SHOULD feel guilty. You should also get over it and move on with your life, but if you literally feel NOTHING for losing someone elses hard earned money, something might be wrong with you.
dipnuggetron 11y ago
Never judge a link by the title -- I was certain this was concerning Foursquare.
greenspot 11y ago
Nice write-up, would have loved to know how your current fund performs and who are the losers now.
- tedmiston 11y ago
  Unless you are currently one of those "loser" companies...
habosa 11y ago
Can someone help me do some math here? Take these sentences: "It was all about five investments in which we made 115x, 82x, 68x, 30x, and 21x." "In our 2004 fund, we invested a total of $50mm out of $120mm of total investment in our nine losers. " OK so in the 2004 fund we have $70mm being invested in companies with rates of return between 21x and 115x. Let's be conservative and say the total return on that $70mm was 50x. That means 70mm --> 3.5B. If we assume that's the total return on the fund we get 120mm --> 3.5B. I am now going to assume these returns were realized over a period of 10 years. So that works out to about 40% gains each year (compounded 10 times). Is USV really making 40% every year for a decade? Are other VCs doing that well? I knew these funds were good investments but I didn't realize just how good.
- corin_ 11y ago
  The $70m is over 12 companies of which we know details of 5 of them.
- hullo 11y ago
  They are not all that good. As he says himself, not even their other funds are as good as the 2004.
- manuelflara 11y ago
  Well, investing in startups is a great investment... when you win, like this fund which apparently gave out great returns. But of course, those investors could have also lost all their money. Risk and potential return always go hand in hand when it comes to investing money.
- scott00 11y ago
  No idea how reliable this is, but here's what Forbes has to say about USV's performance: "66.96% IRR for its 2004 fund, a 38.88% IRR for its 2008 fund, a 29.04% IRR for its 2012 fund and a 61.44% IRR for its first opportunities fund" source: http://fortune.com/2014/01/24/union-square-ventures-raises-new-funds/ http://fortune.com/2014/01/24/union-square-ventures-raises-n...
- jimminy 11y ago
elmar 11y ago
The Babe Ruth Effect in Venture Capital http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture-capital/ http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture...
paulpauper 11y ago
My 'fantasy VC' scorecard since 2008 is nearly perfect, having hypothetically put money into snapchat, air BNB, Uber, and Facebook. Picking the future winners from the losers seems very easy, but the problem is if everyone did this strategy many companies would go unfunded. Just simply funding companies that are already big and growing rapidly and riding the momentum, seems to guarantee the most consistent returns. Investing in tiny startups seems not worth it since the expected value is not high enough and the liquidity is probably poor.
- beachstartup 11y ago
  > Just simply funding companies that are already big and growing rapidly and riding the momentum, seems to guarantee the most consistent returns if you ever try raising money, you'll find this is pretty much what 99% of money people do. and they'll say it to your face, because what are you going to do about it? beg harder? it's a bullshit job, to be honest. anyone with decent intelligence and basic social skills could do it. that's why they guard the industry tooth and nail. i'm no yc fanboy but in my opinion that's what makes them "the 1%", they actually invest in risky startups, en masse. i try to picture some of the vc/pe firms i've talked to doing this, and it doesn't even compute.
- kevando 11y ago
  I bet you only watch the best SNL skits, too.
- vadym909 11y ago
  <but the problem is if everyone did this strategy many companies would go unfunded> Unfunded by VCs- Not unfunded per se. You can always bootstrap or get Angel-funded. If you are making a dentist office software, find a rich dentist- not a VC.
xpda 11y ago
It's risk/reward. Whether a VC fund, NYSE, or government security, you can risk more for greater reward. This does not mean, as the article implies, that you should. It depends on the individual and the purpose of the investment. I can probably make a lot more money investing in a riskier company, but I am also more likely to lose some or all of my investment. If I am considering investment in a fund that expects a 40% annual return, I should remind myself that if it was a sure bet, then enough people would be investing in it to drive the price up and the return down. There are plenty of investors as smart as me, and many of them are willing to do more research than I am.
nostrademons 11y ago
This can also be a good rule of thumb for entrepreneurs investing in ideas or potential new features, or even for ordinary employees managing their careers. You can get surprisingly far in life simply by cutting your losses early. If you majored in art history, got to junior year, and then suddenly realized there are no jobs available - switch your major! Or transfer, if you have to. If you hate your job, find another one! If your skillset is out of date, learn whatever the new hotness is. If you picked a dead-end field that's being disrupted by a new industry, switch to the new industry. Many people don't do this, because of a couple of cognitive biases: sunk cost fallacy and fear of the unknown. But they ignore that they've learned new information in whatever their old role was, and that the future is usually much longer than the past.
- yesimahuman 11y ago
  Not to mention the social pressure to never give up or quit anything. A lot of people would do well to quit and move on from something that just isn't working.
- dgant 11y ago
  Plus https://en.wikipedia.org/wiki/Effort_justification https://en.wikipedia.org/wiki/Effort_justification
deleted 11y ago
[deleted]
addyy 11y ago
great article its really gonna help me to save money without losing
hackaflocka 11y ago
> I am a big believer in “loving your losers” in the sense that you should not orphan them and you should work hard to get to the right outcome. From the guy who talked about cutting off losers early a paragraph ago.

260 points by ghosh 11y ago

It would be awesome to see a list of the winning companies and the approximate multiple on invested capital returned for each of them, along with which companies fizzled out. Not expecting to ever see that, but it would be interesting to learn which ones they thought would be huge successes and what the eventuality was.

eastdakota 11y ago
USV's 2004 fund invested in Twitter, Tumblr, Indeed, Etsy, and Zynga. Those likely represent the 5 double-digit return multiples Fred references. It was an astonishingly good fund — certainly among the best of its vintage and perhaps among the best of all time.
- vram22 11y ago
  Indeed.com sold for around $1 billion, or so I heard from a startup founder that I did some consulting work for (he was in the recruitment space too, and had a prior exit or two). Later googled for that info and saw links that looked like it was true. A Japanese company recruiter.com bought it. Interestingly, I don't remember reading about the Indeed sale on Fred's blog, though I've been reading it for some years now. Could have missed the post, or could be he never wrote about it. Edit: grammar.
  - mikeyouse 11y ago
    http://avc.com/2012/09/indeed/ http://avc.com/2012/09/indeed/ > Indeed has always been the quiet one. Nobody really talks about them. But as I have said a number of times on this blog, they are the most complete company in our portfolio. They have it all. Two world class entrepreneurs as founders. A solid management team all up and down the company. A product that is beloved and services more than 80mm people worldwide every month. An engineering team that has kept the service up with literally no down time that I can ever remember. A business model that, like Google's, is the best on the Internet. Revenues, profits, customer satisfaction, shareholder value. They built a fortress and I am just so happy to have had a front row seat watching them build it.
    - vram22 11y ago
      Ah, thanks, obligado.
    - vram22 11y ago
      Also, just saw at the AVC link you posted, this: http://avc.com/2012/09/indeed/#comment-662213687 http://avc.com/2012/09/indeed/#comment-662213687 Indeed used Lucene.

db1 11y ago

I raised a small seed round (200k) on my first company. At that time I felt like it was a staggering amount of money. The company didn't work and out we pretty much lost all of it. For the longest time, I felt really guilty about how I had lost my investors money. I have a little more perspective now and realize that it was practically insignificant to my investor. Ah well.

buro9 11y ago
It is indeed comforting. We lost our investors 150k GBP, and I've been feeling guilty about that. Investors invest what they can afford to lose.
tedmiston 11y ago
I think there's a similar founder guilt when founders go through an accelerator, but their company doesn't work out.
vthallam 11y ago
Tough luck! I have never raised funds and planning to raise funds soon, but back of mind, i do have fear of losing the investors money. I think the founders should get over this guilt as long as they were lean and did everything they could to save the company. Btw, How did your investors respond when it didn't work out?
- db1 11y ago
  Things actually worked out okay. We had a sit down and amicably decided to wind things down. So I guess it hit me hard, but really was not a big deal to my investor.
brianwawok 11y ago
Honestly I think it is good to feel guilty. If you felt 0 guilt and just shrugged, I think it would make you seem a little bit of a irresponsible sociopath. Now obviously don't live in a basement for 6 months because of your sadness, it was an investment that they could afford to lose ;) But I think it normal / expected to feel sad/guilty when you let someone down...

sakri 11y ago

Why does he use mm ($25mm)?

bryanlarsen 11y ago
'M' is the roman numeral for thousand, so 25m traditionally means 25000. mm is thousand thousand, aka million.
- xentronium 11y ago
  That notation doesn't really make much sense though, since MM is roman for two thousand.
  - IshKebab 11y ago
    Yeah and also literally no-one says "25M" when they mean 25000.
- zeeZ 11y ago
  And SI uses 'M' as a prefix for one million. Oxford defines 'm' as million(s) in a money context, Merriam-Webster includes 'M' as an abbreviation of million. It seems odd that anyone would think $25m should be read as $25000. It's much more likely that I would read $25mm as 25 millimeters instead.
  - bryanlarsen 11y ago
    The problem is that there are multiple traditional usages, with overlapping meanings. Capital M has traditionally stood for both thousand and million. In other words $20M and $20m is ambiguous, depending on what tradition you come from. $20MM and $20MM and $20k are not ambiguous.
- colinbartlett 11y ago
  I believe the traditional usage requires capital M: $20M = $20,000 $6MM = $6,000,000 Of course, it's more common now to use lowercase k: $30k = $30,000

karterk 11y ago

This also explains why VCs look to fund billion dollar opportunities even if they look a little risky. VCs are in the game for big exits and that's how the math works out. Something to keep in mind when you're planning to raise money.

90002 11y ago
I think entrepreneurs often forget that VC's are deploying OPM, which puts an enormous amount of pressure on the firm to deliver outsized returns. I've met a few entrepreneurs over the years that fail to understand this fully - sad!
- tedmiston 11y ago
  Other People's Money Ah. http://www.bmecapital.com/Common_Practices.html http://www.bmecapital.com/Common_Practices.html

tedmiston 11y ago

Is there a technical meaning when he refers to fund years as "2008 vintage" vs. just "2008"?

joncrocks 11y ago
Not beyond what you'd probably assume it to mean... http://www.investopedia.com/terms/v/vintage_year.asp http://www.investopedia.com/terms/v/vintage_year.asp
- tedmiston 11y ago
  So, the idea: is "compare this fund against others that were started in economic conditions like 2008", not say 2006 or 2012. Does that seem right?
  - taylorwc 11y ago
    Yes exactly. Like cohort analysis for venture funds. Compare them to peers that had experienced the same macro trends and conditions.
adewinter 11y ago
I suspect it's more of a pompous thing. Thinking of the funds like wines: they mature/get better with age.
- taylorwc 11y ago
  It's not really pompous. Fund 'vintage' is the way that VC firm partners (GP's) have to orient their thinking because it's how their investors (LP's) measure the success of a particular investment in their firm. The term vintage has been standard fare in this world for a long time, even if it draws its roots elsewhere... See also: 'carried interest'[0], which draws its origin from shipping centuries ago. [0] https://en.wikipedia.org/wiki/Carried_interest https://en.wikipedia.org/wiki/Carried_interest
debacle 11y ago

homero 11y ago

Good thing he's got bitcoin to fall back on when the vc bubble pops

tedmiston 11y ago

Peter Thiel in Zero to One: > The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined. > This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.

ssharp 11y ago
Do most VC's think this way and is this actually a "rule", meaning it's the way you succeed? I'd think VC investing is like most other types of investing where you can take on different strategies depending on your goal. Some investors will take large risk in order for large reward, where other investors would rather take lower risk for a higher probability of some positive return.
- supster 11y ago
  Yeah I feel that tends to play out based on what class of VC you are. E.g. seed/angels -> high risk / big portfolio (100s startups) / huge win-loss multiples (but invest small $) traditional VCs/Seed A-C -> medium risk / moderate portfolio size (10s) / medium win-loss multiples (but invest medium $$) growth private equity -> small risk / small portfolio (singles) / small win-loss multiples (but invest huge $$$) Of course the divisions are arbitrary and some investors put money in all categories, but I feel like the above holds true in general.
- karmacondon 11y ago
  I think it's a "rule" as opposed to a strategy like "don't sacrifice your pieces in exchange for nothing" is a rule in chess. It's possible to succeed without following that guide line, but it's very difficult. VC firms produce modest returns for a very high risk. You've probably only heard of one out every hundred companies that have been venture funded. Low risk investments just don't produce enough return.
- 11y ago

sz4kerto 11y ago

Note: Ben Graham wrote about all these decades ago. (It doesn't make this article less true, etc. -- just if you're interested in these basic rules of investing, then read 'The Intelligent Investor'.)

ghshephard 11y ago
I thought Ben Graham, and the Intelligent Investor, was the absolute antithesis of high risk Venture Capital. From the introduction to that book: "Our text is directed to investors as distinguished from speculators, and our first task will be to clarify and emphasize this now all but forgotten distinction. We may say at the outset that this is not a “how to make a million” book. " and " “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”" Fred Wilson is in a very, very different space then Ban Graham was discussing in the Intelligent Investor.
- dbcurtis 11y ago
  They are both speculators, just different time horizon. My epiphany came when a few years ago I had a conversation with a friend who is a brewmeister and restaurant manager for properties owned by his family's trust. (If you live on the Peninsula, you have probably had his beer.) His grandfather had set up a trust in order to pass his Monterey-area produce farm to his children, and the trust and farm are still going, and growing. My friend mentioned he was spending the weekend at a family retreat with some of his siblings and cousins that were the current trust management. The topic for the retreat was identifying which of "the cousins" (the pre-teen and teenage children of the next generation) were likely to be future manager-trustees, and which were likely to be passive trustees. The goal being to start identifying and grooming the next generation of management. So my definition of investor: If you are managing the asset with the intention that someday your as-yet unborn grandchildren will be taking over and managing the asset, you are an investor. All else is speculation, just on various time horizons. An investor is never looking for liquidity, ever -- only speculators expect to turn an asset into cash in the foreseeable future.

baccredited 11y ago

I'll summarize: Many startups fail. Don’t throw good money after bad.

dataker 11y ago

Why would anyone feel guilty about losing money from a VC? In the end, it's a venture capital FUND: risk and return are inherent to this. It's not the VC's money, but a collection of GPs (themselves have thousands of individual investors). Your loss is already accounted for in their portfolio. Otherwise, they're not doing it right.

taylorwc 11y ago
Have you ever taken money from outside investors? It doesn't really matter whether the investor expects loss or at least is aware of the risk. Losing other people's money when they took a bet on you is a miserable feeling. Add it on to the list of things that can keep you awake at night when you're a founder or startup exec.
- dataker 11y ago
  No I haven't, but I have money on companies. Many things can happen (disease, conflict, competition,etc) and I surely won't make a founder feel terrible about himself because of that. Instead, I pick someone with a different personality, industry and network that is able to balance my risk.
  - taylorwc 11y ago
    I applaud that you would never try to make a founder feel terrible intentionally. That said, most founders end up struggling with those feelings regardless. It's an awful feeling, even if you know your investors understand that there is huge risk and don't demand a guaranteed home run (not that there is such a thing).
brianwawok 11y ago
See my other comment. I think you SHOULD feel guilty. You should also get over it and move on with your life, but if you literally feel NOTHING for losing someone elses hard earned money, something might be wrong with you.

dipnuggetron 11y ago

Never judge a link by the title -- I was certain this was concerning Foursquare.

greenspot 11y ago

Nice write-up, would have loved to know how your current fund performs and who are the losers now.

tedmiston 11y ago
Unless you are currently one of those "loser" companies...

habosa 11y ago

Can someone help me do some math here? Take these sentences: "It was all about five investments in which we made 115x, 82x, 68x, 30x, and 21x." "In our 2004 fund, we invested a total of $50mm out of $120mm of total investment in our nine losers. " OK so in the 2004 fund we have $70mm being invested in companies with rates of return between 21x and 115x. Let's be conservative and say the total return on that $70mm was 50x. That means 70mm --> 3.5B. If we assume that's the total return on the fund we get 120mm --> 3.5B. I am now going to assume these returns were realized over a period of 10 years. So that works out to about 40% gains each year (compounded 10 times). Is USV really making 40% every year for a decade? Are other VCs doing that well? I knew these funds were good investments but I didn't realize just how good.

corin_ 11y ago
The $70m is over 12 companies of which we know details of 5 of them.
hullo 11y ago
They are not all that good. As he says himself, not even their other funds are as good as the 2004.
manuelflara 11y ago
Well, investing in startups is a great investment... when you win, like this fund which apparently gave out great returns. But of course, those investors could have also lost all their money. Risk and potential return always go hand in hand when it comes to investing money.
scott00 11y ago
No idea how reliable this is, but here's what Forbes has to say about USV's performance: "66.96% IRR for its 2004 fund, a 38.88% IRR for its 2008 fund, a 29.04% IRR for its 2012 fund and a 61.44% IRR for its first opportunities fund" source: http://fortune.com/2014/01/24/union-square-ventures-raises-new-funds/ http://fortune.com/2014/01/24/union-square-ventures-raises-n...
jimminy 11y ago

elmar 11y ago

The Babe Ruth Effect in Venture Capital http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture-capital/ http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture...

paulpauper 11y ago

My 'fantasy VC' scorecard since 2008 is nearly perfect, having hypothetically put money into snapchat, air BNB, Uber, and Facebook. Picking the future winners from the losers seems very easy, but the problem is if everyone did this strategy many companies would go unfunded. Just simply funding companies that are already big and growing rapidly and riding the momentum, seems to guarantee the most consistent returns. Investing in tiny startups seems not worth it since the expected value is not high enough and the liquidity is probably poor.

beachstartup 11y ago
> Just simply funding companies that are already big and growing rapidly and riding the momentum, seems to guarantee the most consistent returns if you ever try raising money, you'll find this is pretty much what 99% of money people do. and they'll say it to your face, because what are you going to do about it? beg harder? it's a bullshit job, to be honest. anyone with decent intelligence and basic social skills could do it. that's why they guard the industry tooth and nail. i'm no yc fanboy but in my opinion that's what makes them "the 1%", they actually invest in risky startups, en masse. i try to picture some of the vc/pe firms i've talked to doing this, and it doesn't even compute.
kevando 11y ago
I bet you only watch the best SNL skits, too.
vadym909 11y ago
<but the problem is if everyone did this strategy many companies would go unfunded> Unfunded by VCs- Not unfunded per se. You can always bootstrap or get Angel-funded. If you are making a dentist office software, find a rich dentist- not a VC.

xpda 11y ago

It's risk/reward. Whether a VC fund, NYSE, or government security, you can risk more for greater reward. This does not mean, as the article implies, that you should. It depends on the individual and the purpose of the investment. I can probably make a lot more money investing in a riskier company, but I am also more likely to lose some or all of my investment. If I am considering investment in a fund that expects a 40% annual return, I should remind myself that if it was a sure bet, then enough people would be investing in it to drive the price up and the return down. There are plenty of investors as smart as me, and many of them are willing to do more research than I am.

nostrademons 11y ago

This can also be a good rule of thumb for entrepreneurs investing in ideas or potential new features, or even for ordinary employees managing their careers. You can get surprisingly far in life simply by cutting your losses early. If you majored in art history, got to junior year, and then suddenly realized there are no jobs available - switch your major! Or transfer, if you have to. If you hate your job, find another one! If your skillset is out of date, learn whatever the new hotness is. If you picked a dead-end field that's being disrupted by a new industry, switch to the new industry. Many people don't do this, because of a couple of cognitive biases: sunk cost fallacy and fear of the unknown. But they ignore that they've learned new information in whatever their old role was, and that the future is usually much longer than the past.

yesimahuman 11y ago
Not to mention the social pressure to never give up or quit anything. A lot of people would do well to quit and move on from something that just isn't working.
dgant 11y ago
Plus https://en.wikipedia.org/wiki/Effort_justification https://en.wikipedia.org/wiki/Effort_justification

deleted 11y ago

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addyy 11y ago

great article its really gonna help me to save money without losing

hackaflocka 11y ago

> I am a big believer in “loving your losers” in the sense that you should not orphan them and you should work hard to get to the right outcome. From the guy who talked about cutting off losers early a paragraph ago.