3 ms·

The role of a VC is supposed to be such that they invest in "infantile" businesses so they can become "mature". But alot of people seem to be playing valuation

by max_ 2y ago

The role of a VC is supposed to be such that they invest in "infantile" businesses so they can become "mature". But alot of people seem to be playing valuation Ponzi's instead of facilitating the growth of young businesses. It's really easy to do well in VC. But the strong herd effect made me realise that alot of VCs are just "me too" investors. I am not surprised by this. Majority don't "build the future" like the marketing material suggests. It's all a veneer. Very few VCs actually do "Venture Capital". It's not exploratory it's just "Herd Capital"

sib 2y ago
"It's really easy to do well in VC" It's relatively easy as a General Partner in VC to collect fees leading to a decent salary for a while. It's quite hard (rare) to do well enough to outperform the public markets consistently on a risk- and liquidity-adjusted basis. If you look at the metrics on fund performance, most of them are really pretty bad.
- max_ 2y ago
  They are bad because 99% are herd animals. The for instance look at public markets. Passive S&P allocations outperform most hedge funds. You can outperform 99% of hedge funds just by buying the S&P. The same goes for VCs. Just by spraying small checks over a wide spectrum you can do very well (outperform the S&P and most VCs). But 99% prefer "me too" investments. Paul Graham talked about this: "Whoever the next Google is, they're probably being told right now by VCs to come back when they have more "traction." Why are VCs so conservative? It's probably a combination of factors. The large size of their investments makes them conservative. Plus they're investing other people's money, which makes them worry they'll get in trouble if they do something risky and it fails. Plus most of them are money guys rather than technical guys, so they don't understand what the startups they're investing in do." ... "I've tried to explain this to VC firms. Instead of making one $2 million investment, make five $400k investments. Would that mean sitting on too many boards? Don't sit on their boards. Would that mean too much due diligence? Do less. If you're investing at a tenth the valuation, you only have to be a tenth as sure. It seems obvious. But I've proposed to several VC firms that they set aside some money and designate one partner to make more, smaller bets, and they react as if I'd proposed the partners all get nose rings. It's remarkable how wedded they are to their standard m.o." — link https://www.paulgraham.com/googles.html https://www.paulgraham.com/googles.html
  - gwking 2y ago
    This anecdote intrigues me because it sounds like a group-think dynamic. Perhaps I'm reading too much into the "designate one partner" aspect. But I imagine that behind this is a desire for the partners to all be in agreement about the investments they choose, which leads to them being unable to take a wider array of smaller risks.

by max_ 2y ago

sib 2y ago

"It's really easy to do well in VC" It's relatively easy as a General Partner in VC to collect fees leading to a decent salary for a while. It's quite hard (rare) to do well enough to outperform the public markets consistently on a risk- and liquidity-adjusted basis. If you look at the metrics on fund performance, most of them are really pretty bad.

max_ 2y ago
They are bad because 99% are herd animals. The for instance look at public markets. Passive S&P allocations outperform most hedge funds. You can outperform 99% of hedge funds just by buying the S&P. The same goes for VCs. Just by spraying small checks over a wide spectrum you can do very well (outperform the S&P and most VCs). But 99% prefer "me too" investments. Paul Graham talked about this: "Whoever the next Google is, they're probably being told right now by VCs to come back when they have more "traction." Why are VCs so conservative? It's probably a combination of factors. The large size of their investments makes them conservative. Plus they're investing other people's money, which makes them worry they'll get in trouble if they do something risky and it fails. Plus most of them are money guys rather than technical guys, so they don't understand what the startups they're investing in do." ... "I've tried to explain this to VC firms. Instead of making one $2 million investment, make five $400k investments. Would that mean sitting on too many boards? Don't sit on their boards. Would that mean too much due diligence? Do less. If you're investing at a tenth the valuation, you only have to be a tenth as sure. It seems obvious. But I've proposed to several VC firms that they set aside some money and designate one partner to make more, smaller bets, and they react as if I'd proposed the partners all get nose rings. It's remarkable how wedded they are to their standard m.o." — link https://www.paulgraham.com/googles.html https://www.paulgraham.com/googles.html
- gwking 2y ago
  This anecdote intrigues me because it sounds like a group-think dynamic. Perhaps I'm reading too much into the "designate one partner" aspect. But I imagine that behind this is a desire for the partners to all be in agreement about the investments they choose, which leads to them being unable to take a wider array of smaller risks.