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VC firms invest other people's money and those people have money in a specific fund entity. Each fund has a specific structure that has various rules on stuff

VC firms invest other people's money and those people have money in a specific fund entity. Each fund has a specific structure that has various rules on stuff like minimum investment sizes, ownership and time to return the investors' money. Also, as 9 out of 10 investments, on average, will fail, the 1 that wins has to be big enough to balance out the losses, plus make a profit for the investors that's much greater than putting their money into public stocks, bonds, banks, etc. That's why each investment has to have the potential to be a billion-dollar-plus company, or it doesn't make sense to make the investment in the first place. Very different from angels who are a) happy to wait b) happy to get 3-4x on their money.

duncanawoods 10y ago
> as 9 out of 10 investments, on average, will fail, the 1 that wins has to be big enough This is misleading. It is only because they pursue high risk ventures that 9/10 fail and they are only picking high risk ventures because they dream of x1000 returns. They could use a different investment thesis to choose lower risk, lower payoff companies and have a portfolio where only 1/10 fails. The VC reasoning is that the 1/10 success is not just x20 for an overall x2 return but actually x100 or x1000. I think VC performance over the years has proven this false, especially if you exclude the top VC as outliers, but its glamorous to be a high-rolling gambler so the myth that "VC as unicorn hunter" is the optimal strategy continues.
- jasode 10y ago
  >It is only because they pursue high risk ventures that 9/10 fail and they are only picking high risk ventures because they dream of x1000 returns. But your explanation for their motives is also misleading. A huge constraint on VC's investment strategy is the smaller amount of money they are given. VC's are not giant multi-billion dollar private equity funds like Blackstone/Apollo/Carlyle. (E.g. Blackstone $18 billion fund.[1]) A VC fund may be small like $50 million. Or a more well-known prestige VC can raise $500 million. The recent news of a VC like a16z raising $1.5 billion is a new anomaly.[2] However, the $1.5b is still a fraction of what the private equity guys raise. With a small $50 million fund, that's not enough money to buy management control of the more stable mid-cap and large-cap companies. Therefore, using a portion of a small $50m fund to write a $500k check to a (riskier) YC company is more meaningful than buying $500k worth of Exxon or Apple stock. VCs are shooting for 25%+ returns and it's very difficult to do that with large-cap companies. Even Warren Buffett hasn't been able to do it over a given 10-year period. >They could use a different investment thesis to choose lower risk, lower payoff companies and have a portfolio where only 1/10 fails. If someone can figure out a consistent way to take $50-$100m and return 25%+ by having only 1/10 failures, that would be an amazing investment thesis. I'm unaware of any industry expert who has that track record. [1] https://www.google.com/search?q=latest+blackstone+fund https://www.google.com/search?q=latest+blackstone+fund [2] https://www.google.com/search?q=andreessen+horowitz+latest+fund+billion https://www.google.com/search?q=andreessen+horowitz+latest+f...
- jaredklewis 10y ago
  Sure, VCs could invest in less risky, less rewarding companies, but then they wouldn't be VCs. VCs are an asset class defined by their risk portfolio. Taken on their own, they are clearly using a suboptimal strategy. But no one invests all their money in VCs. As part of a diversified portfolio, it's actually their high risk strategy that hedges againsts other kinds of risks (like the risks that the old, stable companies underperform).
riteshpatel 10y ago
Something I just saw in my news feed that'll also help to give more insight: https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2#.hbi85ta66 https://medium.com/jme-venture-capital/meaningful-vc-exits-2...

duncanawoods 10y ago

> as 9 out of 10 investments, on average, will fail, the 1 that wins has to be big enough This is misleading. It is only because they pursue high risk ventures that 9/10 fail and they are only picking high risk ventures because they dream of x1000 returns. They could use a different investment thesis to choose lower risk, lower payoff companies and have a portfolio where only 1/10 fails. The VC reasoning is that the 1/10 success is not just x20 for an overall x2 return but actually x100 or x1000. I think VC performance over the years has proven this false, especially if you exclude the top VC as outliers, but its glamorous to be a high-rolling gambler so the myth that "VC as unicorn hunter" is the optimal strategy continues.

jasode 10y ago
>It is only because they pursue high risk ventures that 9/10 fail and they are only picking high risk ventures because they dream of x1000 returns. But your explanation for their motives is also misleading. A huge constraint on VC's investment strategy is the smaller amount of money they are given. VC's are not giant multi-billion dollar private equity funds like Blackstone/Apollo/Carlyle. (E.g. Blackstone $18 billion fund.[1]) A VC fund may be small like $50 million. Or a more well-known prestige VC can raise $500 million. The recent news of a VC like a16z raising $1.5 billion is a new anomaly.[2] However, the $1.5b is still a fraction of what the private equity guys raise. With a small $50 million fund, that's not enough money to buy management control of the more stable mid-cap and large-cap companies. Therefore, using a portion of a small $50m fund to write a $500k check to a (riskier) YC company is more meaningful than buying $500k worth of Exxon or Apple stock. VCs are shooting for 25%+ returns and it's very difficult to do that with large-cap companies. Even Warren Buffett hasn't been able to do it over a given 10-year period. >They could use a different investment thesis to choose lower risk, lower payoff companies and have a portfolio where only 1/10 fails. If someone can figure out a consistent way to take $50-$100m and return 25%+ by having only 1/10 failures, that would be an amazing investment thesis. I'm unaware of any industry expert who has that track record. [1] https://www.google.com/search?q=latest+blackstone+fund https://www.google.com/search?q=latest+blackstone+fund [2] https://www.google.com/search?q=andreessen+horowitz+latest+fund+billion https://www.google.com/search?q=andreessen+horowitz+latest+f...
jaredklewis 10y ago
Sure, VCs could invest in less risky, less rewarding companies, but then they wouldn't be VCs. VCs are an asset class defined by their risk portfolio. Taken on their own, they are clearly using a suboptimal strategy. But no one invests all their money in VCs. As part of a diversified portfolio, it's actually their high risk strategy that hedges againsts other kinds of risks (like the risks that the old, stable companies underperform).

riteshpatel 10y ago

Something I just saw in my news feed that'll also help to give more insight: https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2#.hbi85ta66 https://medium.com/jme-venture-capital/meaningful-vc-exits-2...