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Indeed there isn't. VC returns are incredibly power law driven - i.e. they come from the 10-15 companies per year that end up being monsters. The valuation that

by deyan 14y ago

Indeed there isn't. VC returns are incredibly power law driven - i.e. they come from the 10-15 companies per year that end up being monsters. The valuation that you invested in is (almost) irrelevant - either you are part of the big successes and have a business as an VC or you didn't participate and don't have a business. That is yet another very counter-intuitive thing about the startup world. In basically every other finance vertical, terms matter greatly. Not so much with VCs. That's why a lot of finance guys make poor VCs, they fundamentally misunderstand the game.

peloton 14y ago
The problem is that the investors mentioned in the post aren't VCs-- they are angel investors. Putting in $100k on a $10M valuation and then getting diluted down over several rounds of venture means that angels don't get compensated for the risk they are taking, even with big exits. These investors also most likely don't have the bank accounts to keep participating pro rata. CB Insights says that 50% of seed companies will go away. And the reward that angels are given to take this risk is a 20% discount to the next priced round. However, one of the benefits of writing smaller checks or running smaller funds is that you're less dependent on monster exits. For investors who are going smaller, valuations and terms do matter a lot more than at typical venture funds (that are very dependent on monster exits).
- btilly 14y ago
  The fun thing about power laws is that they are fractal. Meaning that if you look at a random angel's investment portfolio, most of their returns come from just a handful of their investments. With a smaller pool, those investments may not be the giant monsters that VCs are hoping to get a piece of, but you should still be planning on a power law.
jacquesm 14y ago
> VC returns are incredibly power law driven - i.e. they come from the 10-15 companies per year that end up being monsters. You're almost right. Early stage investing is very much power law driven, later stage (more VC than incubator territory) comes in several flavors, some more relying on outliers than others. Plenty of VCs won't even look at companies that are not yet capable of generating substantial revenues and profits, they are there as growth accelerators or to diversify founder (and early stage investor) risk. There are as many risk profiles as there are VCs, you can't just lump them all on one pile.

by deyan 14y ago

peloton 14y ago

The problem is that the investors mentioned in the post aren't VCs-- they are angel investors. Putting in $100k on a $10M valuation and then getting diluted down over several rounds of venture means that angels don't get compensated for the risk they are taking, even with big exits. These investors also most likely don't have the bank accounts to keep participating pro rata. CB Insights says that 50% of seed companies will go away. And the reward that angels are given to take this risk is a 20% discount to the next priced round. However, one of the benefits of writing smaller checks or running smaller funds is that you're less dependent on monster exits. For investors who are going smaller, valuations and terms do matter a lot more than at typical venture funds (that are very dependent on monster exits).

btilly 14y ago
The fun thing about power laws is that they are fractal. Meaning that if you look at a random angel's investment portfolio, most of their returns come from just a handful of their investments. With a smaller pool, those investments may not be the giant monsters that VCs are hoping to get a piece of, but you should still be planning on a power law.

jacquesm 14y ago

> VC returns are incredibly power law driven - i.e. they come from the 10-15 companies per year that end up being monsters. You're almost right. Early stage investing is very much power law driven, later stage (more VC than incubator territory) comes in several flavors, some more relying on outliers than others. Plenty of VCs won't even look at companies that are not yet capable of generating substantial revenues and profits, they are there as growth accelerators or to diversify founder (and early stage investor) risk. There are as many risk profiles as there are VCs, you can't just lump them all on one pile.