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Most VCs see investments of under $5 million as a waste of time

5 points by nreece 18y ago

pg 18y ago
Geshwiler's mistaken. The more progressive VCs are happy to deals of half a million or less. Even the stodgiest are interested in deals under 2 million. A partner at a famous firm was recently telling me about one of their favorite portfolio companies. Their initial investment was $300k. He was not bummed about that; he was delighted. What "moves the needle" for a fund is the ultimate value of the shares they buy, not how much they cost. That only moves the needle of the fuel gauge.
- staunch 18y ago
  I was under the impression that VCs only get paid their management fee on the portion of their fund they've got in play. I thought that was the explanation for why they still like to invest a lot of money in each company. Doesn't that come into play, at least for the lower tier VCs, who probably won't do well on actual returns?
  - skmurphy 18y ago
    They get a management fee based on the total size of the fund, not just those that have been invested. It's typically between 2 and 3% of the fund per year and in addition to 20% of the profits made, if any, from investments.
    - staunch 18y ago
      That's the part I was unclear on. So if they take a billion dollar fund they're earning $20 million/year even if they've only invested $50 million of it so far?
      - skmurphy 18y ago
        Yes, and for a top tier firm it's closer to $30 million. It's a perverse incentive for increasing the size of the fund, which in turn increases the minimum investment: number of deals is a function of partner bandwidth, deal size is fund size divided by number of deals (you have to allow for follow on investments so it's the total amount invested over all rounds).
  - pg 18y ago
    VCs make money two ways: management fees, and a cut of the returns. The best VCs expect to make most of their money on the returns. Yes, the bad VCs are mostly interested in management fees. But we avoid those. So YC-funded companies rarely encounter them. Actually the distaste is somewhat mutual: the lamer VCs prefer to invest in companies founded by suits. Not sure exactly why. Could be because they're all about looking good on paper. Or it could be just because the VCs are suits themselves.
steveplace 18y ago
I take Roger Ehrenberg's viewpoint about the hedge fund industry and transfer it over to VC capital: it's turning into a barbell. The probability of getting either seed stage or a huge investment is much higher than anything in the middle. It's going to depend on the underlying business and expectations of growth, and there's also capital management and psychological factors, but my guess is that trend will continue.

5 points by nreece 18y ago

pg 18y ago

Geshwiler's mistaken. The more progressive VCs are happy to deals of half a million or less. Even the stodgiest are interested in deals under 2 million. A partner at a famous firm was recently telling me about one of their favorite portfolio companies. Their initial investment was $300k. He was not bummed about that; he was delighted. What "moves the needle" for a fund is the ultimate value of the shares they buy, not how much they cost. That only moves the needle of the fuel gauge.

staunch 18y ago
I was under the impression that VCs only get paid their management fee on the portion of their fund they've got in play. I thought that was the explanation for why they still like to invest a lot of money in each company. Doesn't that come into play, at least for the lower tier VCs, who probably won't do well on actual returns?
- skmurphy 18y ago
  They get a management fee based on the total size of the fund, not just those that have been invested. It's typically between 2 and 3% of the fund per year and in addition to 20% of the profits made, if any, from investments.
  - staunch 18y ago
    That's the part I was unclear on. So if they take a billion dollar fund they're earning $20 million/year even if they've only invested $50 million of it so far?
    - skmurphy 18y ago
      Yes, and for a top tier firm it's closer to $30 million. It's a perverse incentive for increasing the size of the fund, which in turn increases the minimum investment: number of deals is a function of partner bandwidth, deal size is fund size divided by number of deals (you have to allow for follow on investments so it's the total amount invested over all rounds).
- pg 18y ago
  VCs make money two ways: management fees, and a cut of the returns. The best VCs expect to make most of their money on the returns. Yes, the bad VCs are mostly interested in management fees. But we avoid those. So YC-funded companies rarely encounter them. Actually the distaste is somewhat mutual: the lamer VCs prefer to invest in companies founded by suits. Not sure exactly why. Could be because they're all about looking good on paper. Or it could be just because the VCs are suits themselves.

steveplace 18y ago

I take Roger Ehrenberg's viewpoint about the hedge fund industry and transfer it over to VC capital: it's turning into a barbell. The probability of getting either seed stage or a huge investment is much higher than anything in the middle. It's going to depend on the underlying business and expectations of growth, and there's also capital management and psychological factors, but my guess is that trend will continue.