4 ms·

This is regrettably out to lunch, my friend. A 10x return (and a nine-figure absolute return) in two years is "failure" all around? Only in the waning days of

by rlucas 10y ago

This is regrettably out to lunch, my friend. A 10x return (and a nine-figure absolute return) in two years is "failure" all around? Only in the waning days of a market top would such an assertion (that such a return is a "failure" to anyone involved) even have a frisson of plausibility. Also, most of your numbers & ratios are order-of-magnitude right, but as they say, "horseshoes and hand grenades." A $442 M fund size is big enough that returning even a 3x-4x overall, with any consistency, would be downright virtuosic. So, no, they don't need to return $3B or 6-7x the entire fund to be successful (nor do they or their LPs have any realistic expectation of doing so). The long game, as always, is to try to have just ONE Google in your portfolio (the 400x+). But the short and mid games dominate, and they are about staying alive long enough to have enough at-bats to hit that grand slam. And the absolute, bar-none best way to stay alive that long, is to consistently make money for your investors. Finally, the ex ante assumptions and hopes and dreams are not really the way to judge the decision to sell Trello. That decision must be judged on facts in hand at the time. And frankly, at that time, Trello was a leading Kanban app, with no obvious or de-risked path toward a 10x or 100x from where they were. TL;DR: Nobody actually in that game is pooh-poohing a 9-figure exit for 10x in 2 years with a straight face.

jasode 10y ago
>is "failure" all around? It's definitely not failure all around. >A $442 M fund size is big enough that returning even a 3x-4x overall, with any consistency, would be downright virtuosic. A 3x return is 11.6%/year which isn't much more than Warren Buffet's Berkshire Hathaway (9.6% last time I checked) -- given the increased risk of VC funds. BH stock also doesn't have overhead of 2/20 fees. Every institutional investor is different but many would look at safer investments if they are targeting ~11%. If Sequoia, USV, etc are consistently returning 20+%, that's what the competitive levels among top VCs look like. Maybe it's unreasonable for LP's to expect returns like that from a VC fund but they do.
- rlucas 10y ago
  11.6% a year for 10 years compounds out to 3x. If it was 10 years to 4x, that would be 15%. Which would be a very respectable risk premium over BH, the greatest publicly-traded large hedge fund/conglomerate of all time. But, the "percent" returns, as opposed to cash-on-cash, aren't actually calculated that way. Most funds eventually call something close-ish to 100% of capital (1.0x paid-in), so you can meaningfully-ish talk about the "times money" on the entire fund. But it doesn't work for "percent" returns, which are necessarily annualized. Funds call capital over time, not all at once. They also pay back distributions as they become liquid, not all at the end. Investors measure this with IRR, taking into account the timing and magnitudes of the cash flows. So a fund that posts up a 4x "times money" within ~ 10 years is going to have a substantially better IRR than 15%. WRT LP expectations: institutional investors aren't just weighing VC against "safer investments." They look at long-term historical data about different asset classes, project out their best opinions about likely risk and return AND correlations among classes, and make a top-down decision about where to allocate. Then, within each bucket, they try to select a group of managers who can meet (or ideally safely beat) those assumptions. (If rather small, they may delegate this to a fund-of-funds; if rather large, they may further differentiate into various stages or strategies of venture, and the process is more or less fractal.) Partly we may be talking past each other because "expect" here could mean various things. One thing that's clear is no major LP / institution is going to be invested only in one VC firm or only one vintage year. They think about these things in aggregate and over time. If by "expect" you mean, "in aggregate and over time, some LPs project 20% IRR for the venture asset class (subject to a very high, like say 25%+ std dev)" I think that's very fair and you'd be right. But if by "expect" you mean "LPs look at each venture investment and rely on it to consistently return 20% IRR, or that will have been deemed a failure" then you're not giving them enough credit. #1 driver of venture performance: fund vintage year. #2 driver of venture performance: manager persistence (manager skill/alpha). But to bubble back up to the higher level: LPs who see 10x, 9-figure exits in 2 years coming out of the portfolio of a ~$400M fund are not going to say "why not $3B?" They are going to understand that it's a rare fund in a rare vintage year that is going to return 7x+ on the whole fund, and they are going to be exceedingly happy if the "off years" consistently return 3x.
- valuearb 10y ago
  Personally I doubt most VCs provide better returns than Buffett, in fact as a class I'd be surprised if they are significantly better than the stock market. But their model is that they need 10x return investments to pay for all the 0x return investments they make. A 3x return is viewed as a disappointment from that perspective.
  - rlucas 10y ago
    You're confusing the fund level return with individual portfolio companies. This entire thread has been premised on the idea of getting a 10x on an individual investment. The instant matter of a 3x is a 3x at the fund level, which I'm trying to say is no slouch, and if it's consistent would generally be considered outperformance.

by rlucas 10y ago

jasode 10y ago

>is "failure" all around? It's definitely not failure all around. >A $442 M fund size is big enough that returning even a 3x-4x overall, with any consistency, would be downright virtuosic. A 3x return is 11.6%/year which isn't much more than Warren Buffet's Berkshire Hathaway (9.6% last time I checked) -- given the increased risk of VC funds. BH stock also doesn't have overhead of 2/20 fees. Every institutional investor is different but many would look at safer investments if they are targeting ~11%. If Sequoia, USV, etc are consistently returning 20+%, that's what the competitive levels among top VCs look like. Maybe it's unreasonable for LP's to expect returns like that from a VC fund but they do.

rlucas 10y ago
11.6% a year for 10 years compounds out to 3x. If it was 10 years to 4x, that would be 15%. Which would be a very respectable risk premium over BH, the greatest publicly-traded large hedge fund/conglomerate of all time. But, the "percent" returns, as opposed to cash-on-cash, aren't actually calculated that way. Most funds eventually call something close-ish to 100% of capital (1.0x paid-in), so you can meaningfully-ish talk about the "times money" on the entire fund. But it doesn't work for "percent" returns, which are necessarily annualized. Funds call capital over time, not all at once. They also pay back distributions as they become liquid, not all at the end. Investors measure this with IRR, taking into account the timing and magnitudes of the cash flows. So a fund that posts up a 4x "times money" within ~ 10 years is going to have a substantially better IRR than 15%. WRT LP expectations: institutional investors aren't just weighing VC against "safer investments." They look at long-term historical data about different asset classes, project out their best opinions about likely risk and return AND correlations among classes, and make a top-down decision about where to allocate. Then, within each bucket, they try to select a group of managers who can meet (or ideally safely beat) those assumptions. (If rather small, they may delegate this to a fund-of-funds; if rather large, they may further differentiate into various stages or strategies of venture, and the process is more or less fractal.) Partly we may be talking past each other because "expect" here could mean various things. One thing that's clear is no major LP / institution is going to be invested only in one VC firm or only one vintage year. They think about these things in aggregate and over time. If by "expect" you mean, "in aggregate and over time, some LPs project 20% IRR for the venture asset class (subject to a very high, like say 25%+ std dev)" I think that's very fair and you'd be right. But if by "expect" you mean "LPs look at each venture investment and rely on it to consistently return 20% IRR, or that will have been deemed a failure" then you're not giving them enough credit. #1 driver of venture performance: fund vintage year. #2 driver of venture performance: manager persistence (manager skill/alpha). But to bubble back up to the higher level: LPs who see 10x, 9-figure exits in 2 years coming out of the portfolio of a ~$400M fund are not going to say "why not $3B?" They are going to understand that it's a rare fund in a rare vintage year that is going to return 7x+ on the whole fund, and they are going to be exceedingly happy if the "off years" consistently return 3x.
valuearb 10y ago
Personally I doubt most VCs provide better returns than Buffett, in fact as a class I'd be surprised if they are significantly better than the stock market. But their model is that they need 10x return investments to pay for all the 0x return investments they make. A 3x return is viewed as a disappointment from that perspective.
- rlucas 10y ago
  You're confusing the fund level return with individual portfolio companies. This entire thread has been premised on the idea of getting a 10x on an individual investment. The instant matter of a 3x is a 3x at the fund level, which I'm trying to say is no slouch, and if it's consistent would generally be considered outperformance.