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laughing at the default variables in the spreadsheet. ludicrous the idea that you can get a 50x return by owning a 1% of a company that was seeded at a $10m val

laughing at the default variables in the spreadsheet. ludicrous the idea that you can get a 50x return by owning a 1% of a company that was seeded at a $10m valuation. ....and lets just assume a $1B exit for arguments sake! haha, this guy must be raising money for a seed fund or something. -- oh yeah, and the fact that prorata shares actually cost you something, you don't get them for free as Aaron seems to think.

7Figures2Commas 12y ago
Yes, the numbers are absurd. I feel sorry for LPs in any seed fund run by somebody who is handing out $10 million valuations. As for the $1 billion exit, according to CB Insights, in 2013, 19 tech companies went public or were acquired at a billion-plus valuation. That represents slightly more than 1% of all exits. Over 70% of the exits were under $200 million. So any angel banking on billion dollar exits would probably be better off going to Vegas.
- akharris 12y ago
  See Paul's comment above - not really sure why this is absurd. The vast majority of venture returns are in the extreme long tail outcomes.
  - 7Figures2Commas 12y ago
    The rule of thumb is that 20% of a venture fund's investments produce 80% of the returns. Outside of the top performing funds, those returns are generally not eye-popping. The economics of a seed stage fund differ from a traditional venture fund. Stakes are a lot smaller and the number of portfolio companies is a lot larger. Maintaining a stake can be difficult, even with pro rata rights, because the cost of participating in future financings can be too high. Valuation is absolutely crucial to successful startup investing at the seed stage. A seed stage fund that hands out $10 million valuations like candy is not likely to be very successful. Based on the percentages, a seed stage fund that has several hundred companies in its portfolio is still unlikely to see a billion dollar exit. According to CB Insights, 45% of exits in 2013 were at valuations under $50 million. Do the math. If you invest at bloated valuations at the seed stage, you're not statistically likely to produce great returns when all is said and done, even if you are better than most at selecting companies that have liquidation events (most don't obviously).
joshu 12y ago
Indeed. I often pass on my prorata simply because it would be too expensive to keep up with, and it would mean not investing in new companies. Since that's the fun part, I am happy to do that instead.
- vasilipupkin 12y ago
  Theoretically, you could form special purpose vehicles with the intention to exercise your rights without putting a lot of your own money in. But yeah, I am with you, on the most successful companies, valuation ends up being too high for a seed investor anyway
  - pbreit 12y ago
    Maybe pro-rata would be more palatable if it was not assignable? It makes sense to me that early investors get a shot in later rounds. Whether they should be able to maintain percentages is a different topic. Without ability to assign, I suspect many might not maintain percentage anyway.
paul 12y ago
Why is that ludicrous? I've gotten > 50x return multiple times. If you invest in winners, it's not unreasonable -- that's where most of the money is made in this business, and why it matters to not get squeezed out of the big hits.

7Figures2Commas 12y ago

Yes, the numbers are absurd. I feel sorry for LPs in any seed fund run by somebody who is handing out $10 million valuations. As for the $1 billion exit, according to CB Insights, in 2013, 19 tech companies went public or were acquired at a billion-plus valuation. That represents slightly more than 1% of all exits. Over 70% of the exits were under $200 million. So any angel banking on billion dollar exits would probably be better off going to Vegas.

akharris 12y ago
See Paul's comment above - not really sure why this is absurd. The vast majority of venture returns are in the extreme long tail outcomes.
- 7Figures2Commas 12y ago
  The rule of thumb is that 20% of a venture fund's investments produce 80% of the returns. Outside of the top performing funds, those returns are generally not eye-popping. The economics of a seed stage fund differ from a traditional venture fund. Stakes are a lot smaller and the number of portfolio companies is a lot larger. Maintaining a stake can be difficult, even with pro rata rights, because the cost of participating in future financings can be too high. Valuation is absolutely crucial to successful startup investing at the seed stage. A seed stage fund that hands out $10 million valuations like candy is not likely to be very successful. Based on the percentages, a seed stage fund that has several hundred companies in its portfolio is still unlikely to see a billion dollar exit. According to CB Insights, 45% of exits in 2013 were at valuations under $50 million. Do the math. If you invest at bloated valuations at the seed stage, you're not statistically likely to produce great returns when all is said and done, even if you are better than most at selecting companies that have liquidation events (most don't obviously).

joshu 12y ago

Indeed. I often pass on my prorata simply because it would be too expensive to keep up with, and it would mean not investing in new companies. Since that's the fun part, I am happy to do that instead.

vasilipupkin 12y ago
Theoretically, you could form special purpose vehicles with the intention to exercise your rights without putting a lot of your own money in. But yeah, I am with you, on the most successful companies, valuation ends up being too high for a seed investor anyway
- pbreit 12y ago
  Maybe pro-rata would be more palatable if it was not assignable? It makes sense to me that early investors get a shot in later rounds. Whether they should be able to maintain percentages is a different topic. Without ability to assign, I suspect many might not maintain percentage anyway.

paul 12y ago

Why is that ludicrous? I've gotten > 50x return multiple times. If you invest in winners, it's not unreasonable -- that's where most of the money is made in this business, and why it matters to not get squeezed out of the big hits.