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Much more concisely explained in PG's "A Unified Theory of VC Suckage": http://www.paulgraham.com/venturecapital.html http://www.paulgraham.com/venturecapital.h

by apu 16y ago

Much more concisely explained in PG's "A Unified Theory of VC Suckage": http://www.paulgraham.com/venturecapital.html http://www.paulgraham.com/venturecapital.html PG's is also far more entertaining to read.

tptacek 16y ago
Strong disagree. That's one of Graham's more informative essays, and it is of course more carefully written, but it's also missing a lot of the vivid detail that that article has. This article's worth it for the "3.6x" explanation alone. Read both.
- pge 16y ago
  "3.6x" math is not accurate. If I have time, I'll write a longer explanation (full disclosure - I'm a partner at a VC firm). Short version - returns are calculated from the moment of investment to the moment of exit, so getting a 2x in 1 year is a 100% IRR. You do not spread it out over 10 years. LPs get their money back and deploy it in other asset classes, so the return clock for those dollars has stopped. Yes, management fees go out every year (at least for the first five or so years), so that works against short holds, but for the most part a fast exit is never a bad thing, unless the cash on cash multiple is really low. There's a tension in both funds and LPs as to which metric is more important, IRR (which rewards fast exits, even at low multiples) or multiple of invested capital (which rewards holding out for more cash out, even if it takes a lot longer). GPs generally have an incentive for the latter. LPs sometimes prefer the former. To the original author, if you're a HN reader - most people, myself included, would happily share our perspective as fund managers. It would have been worthwhile for you to do so, before you posted the blog post. Understanding fund economics is definitely a good thing for entrepreneurs, and I applaud those like Fred Wilson that have tried to make it more transparent, but don't count on blog posts from Fred or others to fill in all the gaps; go out and ask some people yourself.
danshapiro 16y ago
Thanks for the pointer! It's a great read and I hadn't seen it before. I couldn't find any good resources that explained VC behavior in terms of concrete economics, so I wrote this - hopefully there's enough novel information in it to be of use.

by apu 16y ago

tptacek 16y ago

Strong disagree. That's one of Graham's more informative essays, and it is of course more carefully written, but it's also missing a lot of the vivid detail that that article has. This article's worth it for the "3.6x" explanation alone. Read both.

pge 16y ago
"3.6x" math is not accurate. If I have time, I'll write a longer explanation (full disclosure - I'm a partner at a VC firm). Short version - returns are calculated from the moment of investment to the moment of exit, so getting a 2x in 1 year is a 100% IRR. You do not spread it out over 10 years. LPs get their money back and deploy it in other asset classes, so the return clock for those dollars has stopped. Yes, management fees go out every year (at least for the first five or so years), so that works against short holds, but for the most part a fast exit is never a bad thing, unless the cash on cash multiple is really low. There's a tension in both funds and LPs as to which metric is more important, IRR (which rewards fast exits, even at low multiples) or multiple of invested capital (which rewards holding out for more cash out, even if it takes a lot longer). GPs generally have an incentive for the latter. LPs sometimes prefer the former. To the original author, if you're a HN reader - most people, myself included, would happily share our perspective as fund managers. It would have been worthwhile for you to do so, before you posted the blog post. Understanding fund economics is definitely a good thing for entrepreneurs, and I applaud those like Fred Wilson that have tried to make it more transparent, but don't count on blog posts from Fred or others to fill in all the gaps; go out and ask some people yourself.

danshapiro 16y ago

Thanks for the pointer! It's a great read and I hadn't seen it before. I couldn't find any good resources that explained VC behavior in terms of concrete economics, so I wrote this - hopefully there's enough novel information in it to be of use.