VC is a laughable Shitshow - Change my Mind

Just saw a report about returns of VC - absymal compared to basically everything. PE made a killing, VC returned 1.Xx with a risk profile that is 20x what you would be willing to take on in PE.

I see a lot of idiots getting 8-figure funding for ideas that are borderline-retarded at best. I've seen companies with zero revenues and 20m Cash-Burn being valued at 300m+. Are you guys just in for a huge circle jerk, driving up valuations based on nothing? How can you price in the full upside of 20+ years and still set up a model that shows a return for your fund? Is it just hoping for some poor imbecile to pay the bill at the end of the day? Or am I mising something?

Your pathetic PortCo managed to double its customer base in a year? Yeah, maybe so, but that's like me telling you that my lemonade stand attracted 4 customers a day instead of 2.

What is this shit?

Comments (113)

Feb 27, 2020

I won't try to change your mind. Doing VC in today's environment is akin to playing the greater fool theory.

I'd change your analogy. It's more like you telling me your lemonade stand had a 100x (1 on day 1 and 100 on let's say, day 5) increase in customer base in a few days because you have decided to pay your customers to drink your lemonade. Any idiot can manage a company if turning around a profit is not a requirement.

Maybe I am completely wrong but growth at any cost seems like an impossibly stupid idea. And that exactly is the problem with VC today. The business models may make more sense when compared to the period before the last tech bubble but no one seems to give a shit about the valuation circlejerk in private markets.

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Feb 27, 2020
neil91:

Maybe I am completely wrong but growth at any cost seems like an impossibly stupid idea.

Can you expound on this? Any company that doesn't operate in a brick and mortar environment pays to play, it's kind of the nature of a lot of business models now, be it successful or unsuccessful ones.

Feb 27, 2020

Sure.
Fact 1 - Central Banks around the world have held interest rates lower for longer than anyone has reasonably expected coming out of the GFC. Everyone expects rates to remain lower for longer.
Fact 2 - Growth rates in nearly all markets, developed or developing has trended downwards during that timeframe
Fact 3 - In a low growth world, growth becomes priceless for investors.

Practically, lower interest rates (and consequently lower discount rates) has pushed up valuations for all kinds of private assets from boring old infra assets like utilities to toll roads to sexy start-ups that peddle mattresses with a catchy name and under the guise of a tech company (as a poster has remarked below in this thread).

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Feb 28, 2020

The start-up tech space is characterized by network effects. I think a growth at any cost strategy is certainly justifiable for a company with strong network effects; growth drives value.

Mar 19, 2020

"growth at any cost seems like an impossibly stupid idea". ask amazon if it works, or WeChat, or fb". You know uber was a part time gig for the founders when they started it. Upside is unreal if you nail an uber at ground level... even if you lose 200mill for 6 years straight and hit once what does it matter. Theyre gambling for the big fish. imo

Feb 27, 2020

Source?

CA seems to show otherwise -

CA

It's not a secret that the median VC will lose money - so a lot of the VCs you'll meet are pretty bad. But once you meet those in the top quartile / top decile (e.g Sequoia, Benchmark, FF, etc.), you'll see a huge difference.

Sequoia for example, according to Doug Leone in a recent interview (Acquired fm), has had a couple of near 20x funds. Now I'm not sure if that's gross or net, but regardless that is insane performance. Benchmark's '95 fund returned 42x net, and iirc still holds the record for the best performing VC fund ever.

I do agree that funding has been insane as of late. The WeWork debacle was probably the peak of that cycle. Most VCs I know have corrected for it.

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  • Principal in PE - LBOs
Feb 27, 2020

Where's that table from? A couple things seem a bit weird (buyout loss ratio 3x as severe in 90s than 2000s which is hard to believe and it's hard to quantify/incorporate risk) but I think your takeaway is correct; VC is overwhelming a game of access to top plays / who you know, especially at early stages. This is why the famous guys are able to replicate strong performance in fund after fund. But on the other end of the spectrum, yikes, don't take my money... The trouble with VC at this point is it is super super hard to scale, you can't raise Blackstone size venture funds unless you're willing to a bunch of aggressive growth equity a la softbank. It would be interesting to see how many times oversubbed sequoia's fund are e.g. Hence a lot of capital floating around for second tier players to soak up.

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Feb 27, 2020

"Venture Capital Positively Disrupts Intergenerational Investing" - published last month by Cambridge Associates.

You hit the nail on the head when you say that it's about access and who you know. But think about it from an LP's perspective - it's the same concept. A new LP will have a hard time getting access to the top funds. When any top decile VC wants to raise a new fund, they blast it through their IR person, and their existing LPs re-up. Funds are oversubscribed very quickly because nobody wants to skip a fund and not be able to get in the next one.

So as a new/unknown LP you'll have to settle for Tier 2/3 managers. Your bet at that point is that Tier 2/3 manager will crack top quartile or even top decile with the fund.

Sequoia is a prime example of scaling. They have scout (pre-seed), seed, early, growth, a public equity fund, a FO-style shop, operations in India, China, Europe, etc. Their global growth fund was $8b. I think that's the way to scale in VC - offer downstream/upstream products -different stages, different geographies.

Or be like Benchmark, have an 8-person total shop, take 30% carry, and slay.

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Most Helpful
Feb 28, 2020

This is a great point and something I tell people all the time, but it doesn't capture the full story. Sure, guys like Doug Leone at Sequoia and Marc Andreessen have consistently posted great returns. It's also true that they're massively oversubscribed. You can't get into their funds. They've been closed to new investors for years. It's literally the only reason I would EVER invest in a fund-of-funds. If they have access to Sequoia, Benchmark, Accel, and Andreessen Horowitz, they will probably have excellent returns.

The only other place you see returns in VC are in new managers. This is generally true for PE funds as well, but it's for a very specific type of emerging manager: the principals and partners from the brand-name shops going to set up their own fund for the very first time. They still have all the brand cache of their previous employer, they still have all the contacts, and their deal pipeline is essentially a shadow of the deals they saw at, say, Sequoia. Even if Sequoia passed on a deal, that doesn't mean it's a bad deal. They miss things sometimes.

Those funds tend to do quite well on their first funds. They tend to do less well on their second funds and less well still on their third funds. The reason? They raise more money on each subsequent fund without improving the quality of their deal flow. Arguably, their best deal flow exists in their very first fund since those deals savor of the ones they would have seen right before setting up their fund. Perversely, most institutional LPs don't have meaningful emerging manager programs, and are reluctant to back a first fund, so they miss out on a lot of this deal flow. Those same LPs then make the mistake of investing in fund 2 or fund 3 before the returns from fund 1 are realized. Each subsequent fund tends to be easier to raise capital for, and as a result AUM increases. This generally results in lower DPIs for follow on funds than for first funds, but most investment consultants, endowments, foundations, pension funds and family offices simply don't invest in first-time funds (mostly because those funds don't pass operational due diligence at the investment consultants like Cambridge Associates, Albourne, or Mercer).

This situation is compounded by the fact that 10 years ago, the average time between fund raises was more like 3.5 years. Now, it's 2.25 years. That means you have GPs basically always raising capital instead of focusing on deals and LPs committing capital before DPI is known on the last fund. Frankly, it's fucking dumb, but institutional LPs aren't the cleverest investors in the world. They're asset allocators, and when it comes to PE and VC, they're essentially gambling.

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Feb 28, 2020

This is a great point and something I tell people all the time, but it doesn't capture the full story. Sure, guys like Doug Leone at Sequoia and Marc Andreessen have consistently posted great returns. It's also true that they're massively oversubscribed. You can't get into their funds. They've been closed to new investors for years. It's literally the only reason I would EVER invest in a fund-of-funds. If they have access to Sequoia, Benchmark, Accel, and Andreessen Horowitz, they will probably have excellent returns.

The only other place you see returns in VC are in new managers. This is generally true for PE funds as well, but it's for a very specific type of emerging manager: the principals and partners from the brand-name shops going to set up their own fund for the very first time. They still have all the brand cache of their previous employer, they still have all the contacts, and their deal pipeline is essentially a shadow of the deals they saw at, say, Sequoia. Even if Sequoia passed on a deal, that doesn't mean it's a bad deal. They miss things sometimes.

Those funds tend to do quite well on their first funds. They tend to do less well on their second funds and less well still on their third funds. The reason? They raise more money on each subsequent fund without improving the quality of their deal flow. Arguably, their best deal flow exists in their very first fund since those deals savor of the ones they would have seen right before setting up their fund. Perversely, most institutional LPs don't have meaningful emerging manager programs, and are reluctant to back a first fund, so they miss out on a lot of this deal flow. Those same LPs then make the mistake of investing in fund 2 or fund 3 before the returns from fund 1 are realized. Each subsequent fund tends to be easier to raise capital for, and as a result AUM increases. This generally results in lower DPIs for follow on funds than for first funds, but most investment consultants, endowments, foundations, pension funds and family offices simply don't invest in first-time funds (mostly because those funds don't pass operational due diligence at the investment consultants like Cambridge Associates, Albourne, or Mercer).

This situation is compounded by the fact that 10 years ago, the average time between fund raises was more like 3.5 years. Now, it's 2.25 years. That means you have GPs basically always raising capital instead of focusing on deals and LPs committing capital before DPI is known on the last fund. Frankly, it's fucking dumb, but institutional LPs aren't the cleverest investors in the world. They're asset allocators, and when it comes to PE and VC, they're essentially gambling

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Mar 2, 2020
Principal in PE - LBOs:

buyout loss ratio 3x as severe in 90s than 2000s which is hard to believe and it's hard to quantify/incorporate risk)

Why is that weird? Given the dot come boom so I find it very easy to believe that investments made in 1991-2001 had a much higher loss ratio.

Feb 29, 2020

This is a great post, but I believe using the median is miss leading. Many VC heads talk about finding outliers. That's where your returns come from.

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Feb 27, 2020

Do no VC funds perform? What's an outperforming VC supposed to say to the argument that his asset class is a shitshow . . "um, you're right, all my competitors suck and should close up so I can manage all the money myself." I mean seriously, what else can he say?

I'm long/short public, no shortage of folks who think the market is efficient and guys like me shouldn't exist. They tell me why should I have this career when 80% of active investors can't beat the market. Ummm . . I'm not part of that 80% soooo . . . what then? It makes zero sense to me.

I agree with OP that in sum total, there is a high level of bullshit in VC at the moment. But that's 100% the fault of incompetent managers and incompetent clients who fund them. I don't think it makes VC generally a bullshit concept.

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Feb 27, 2020

Hate to break it to you but literally anyone who manages a decent chunk of change in the public equity world believe that they are the bee's knees (i.e. they are part of the tiny sliver of the group who can consistently beat the market - I am 100% sure far less than 20% of active investors can outperform over 1 or 2 market cycles). Statistically speaking, you are far more likely to be in the group that underperforms even though I believe that you believe you are a part of the outperforming group.

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Feb 27, 2020

Statistically speaking, 100% of those who cannot perform need to believe that nobody else can either.

But the stats only matter in the absence of more info. You can tell an audience of 4,000 Division 1 basketball players that only 100 of them will make the NBA and that statistically speaking, they have almost no chance.

But that info isn't useful to the 150 of them who already know they are in the ballpark of being able to play in the NBA based on their abilities. To those guys, it's meaningless info that they are part of some much larger pool that includes those who lack the talent. Top 75 already know they will be in NBA and next 75 know they're close and will have to get every variable right in college to maximize their chance. The remaining 3,850 know, or should know, that it won't happen for them. So the stat has no value for anyone with more info.

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Feb 27, 2020

Honestly, I think VC in 2020 is absolutely absurd as well. Maybe a few years back it was more palatable as it does serve a purpose in the market to give ostensibly great ideas capital off of just being ideas.

Today it is madness. Whether you blame SoftBank for the greater fool theory of some of these companies to low interest rates, something is wrong.

My favorite non-WeWork example of VC gone awry is the mattress industry. There are so many of these identical products - that in many cases use the same factory - which are sinking pits for marketing dollars. But the strangest part of all of it is that Canadian retailer Sleep Country is actually profitable, pays a dividend and bought out one of the e-commerce companies themselves, and they still trade at both a lower multiple and market cap to Casper. Why people go into VC rounds for other mattress startups is beyond me.

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Feb 28, 2020

Do you see a lot of mattress pitches?

Gun rights activist
Funniest
Feb 29, 2020

ADAM NEUMANN has started his latest tech venture, a mattress company called WeSleep. THE MATTRESS GIRL FROM COLUMBIA gets paid $500M to star in a show on the video platform Quibi, which will totally warrant its $1B+ valuation after it gets 573 subscribers and no viewership. Masayoshi Son watches a video and one minute in, he has ejaculated uncontrollably all over himself. "The last time I saw a company like this, was in 1999. The company? ALIBABA!" he says with glee. "I will invest $200 billion of money from the kingdom of Saudi Arabia!"he shouts ecstatically.

Two years later, everything has gone awry. Adam Neumann loses his CEO position at WeSleep after he is accused of sexual assault by Columbia Mattress girl, and Masayoshi Son disappears after a meeting in the Saudi Arabian embassy. The only winner is Quibi, which is now a Trillion-Dollar giant worth more than Apple and Google combined.

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Mar 6, 2020

Competition is not a crime. Business model innovation in the mattress industry was the real deal, and just like Uber vs Lyft, first to market gets to eat, it was about speed. You need tons of VC money to ramp scale in a B2C market like this, and if you try to scale organically, there won't be much of a lunch left to eat. Everyone was taking bets that the mattress company they backed would get big first, and valuations reflected this, only now things are shaking out and we can see the few winners in the space. I'd also add, don't take VC valuations as gospel, VCs don't, it's more a negotiation tool for private capital and risk compensation. You can show this to be true once you look at acquisition multiples and IPOs, they never really line up with any previous valuation.

Mar 7, 2020

I agree except for the last point - private secondary transactions are often good indicators of what the public markets will price the company at.

Feb 28, 2020

This actually turned into a great thread, wasn't sure where it was going after the OP. Guess I'd always looked at it like Ptero above, the median is crap but the top guys are killing it. But I suppose I'd say the same of a lot of other industries in favor here (HF).

I can just never tell if the stupid shit I see in VC is the sign of something to come in the economy, or business as usual

Feb 28, 2020

Now compare the top quartile in VC to the top quartile in PE.

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Feb 28, 2020

most investors own the S&P and PE -- established firms ripe for disruption. VC provides diversification into the company's that are likely to disrupt the incumbents. people will tolerate underperformance for the benefit of diversification

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Feb 28, 2020

Superb thread -- but I'm definitely exiting to VC over PE when I make the move :)

What concert costs 45 cents? 50 Cent feat. Nickelback.

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  • Incoming Analyst in IB-M&A
Feb 28, 2020

IB to VC is a relatively tough move, no? Remember looking at some team pages and seeing a lot of bios more along the lines of going from early/growth stage tech to VC.

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Feb 28, 2020

As a person who is pretty involved in the VC ecosystem and has friends in PE, I think I can add some color to this:

  • Barriers to entry in seed/series A investing is almost nonexistent and the number of funds/angels involved in early, early stage is pretty insane. If you're outperforming in this category, chances are you have massive prestige in the ecosystem or an unbeatable network.
  • Investing styles in VC are all over the place. You can have 1 fund focused on big bets and commitments to helping portco's with operational efficiencies and another that does 100 scattershot $500k deals with little involvement. Looking at VC returns as a whole really glazes over the fact that there is incredible variability in VC fund types. PE is way, way more standardized. The core concept of LBO is proven and scalable. Not everyone in VC can be the master networker that knows the best deals because there's only so many good deals in early stage.
  • B2B SaaS VC is WAY more attractive returns-wise than B2C or physical B2B. B2B SaaS tends to be subscription revenue, switching cost is higher, and domain expertise can shut out some competition. B2C is sexy (and very fun to talk about) but customers are fickle and if you're selling a physical product, there's way more capex involved to scale so even a winning exit can lead to mediocre returns. The competition for the best deals in B2B also got so competitive that B2B VC's started dipping their toes in B2C and applying the same valuations.

I could go on but most of you should get the point. The concept of efficient markets exist beyond stocks. The more accessible the opportunity is, the less likely you'll get outlier returns on it. If I had a choice though, I would still pick B2C VC over PE or other VC categories any day of the week. Looking at brands, trying new products, and being able to talk with non-finance friends about my job in a fun way really helps with the quality of life.

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Feb 28, 2020

We are not comparing things on a like-for-like basis here. Maybe a bit of background first and then some elements of answer. I started as an angel investor seven years ago while I was in M&A and have invested over the years in a fairly decent number of businesses. I have also been helping a small family office with their VC investments and am in the process of setting up my own micro VC fund. What I am about to write is based on my personal experience, receiving, (skim)reading 40+ pitch decks per week, and meeting two or three entrepreneurs every week for the past few years.

We should look at venture capital as a high risk high ROI asset class and I will never stress this point enough, this is not a game everybody should and can afford to play. VC should be considered as part of a diversification strategy. Most UHNWIs and family offices around me don't allocate more than 5 to 10% of their net worth to this asset class.

As you may know, at the end of each quarter, GPs have to report on the value of invested / cashed out capital, the net IRR achieved, etc. A quick look at the CalPERS website will show you that most private equity funds do not generate returns as high as one would think. This is true across the board from Carlyle and KKR to tiny shops. In the grand scheme of things, achieving 2.0x over a 5-year investment period is great, but far from being the norm or amazing when you can place the same money in liquid assets and achieve similar returns. 15-20 years ago, this was a very different story.

As PE returns dropped over time, more and more people focused on VC to boost the performance of their portfolio(s). "My" FO has achieved an average cash-on-cash return of 4.8x over c.35 investments, with some investments going to zero at the speed of light, two currently doing incredibly well and three exits at 3.5x+.

We should also keep in mind that until recently, venture capital mainly helped financed risky businesses which required a lot of money to produce a minimum viable product ('MVP'). Typically these were and are capital intensive industries such as BioTech, DeepTech, AI... As more and more money was poured into the financial system, VC started investing in consumer-led propositions with little to no tech content. Over the same period, we have observed the rise of D2C businesses which tend to focus on growing their market share asap (i.e. their top-line) at the expense of their bottom line. As long as capital is available and relatively cheap, this is not an issue. When investors start getting nervous (i.e. Commercial wars, Brexit, COVID-19...), this is a very different story and then you end up with disasters such as WeWork, Wag or Simba.

When the average Joe thinks he can make a fortune quickly, this is when people should get scared. VC may be an art according to some, but it actually requires lots of work and you need to meet lots of founders to understand what works and what doesn't. This is a fascinating topic and I could write about it for hours, but for now I am trying to keep it short.

Hope this helps.
Camondo

Feb 28, 2020

At school they told me that if you hold the price of a product below what it costs to produce, so that every time you sell the product you lose money, it is called price fixing. They said that that was illegal and firms would sue each other if they suspected competitors of such tomfoolery.

Silicon Valley calls this a "growth strategy" that is "capturing the market" by "pursuing users" until it achieves an "inflection point", upon which they will increase the price to start making a profit.

Whole thing comes across as a game of musical chairs or hot potato. Everything works as long as you're not holding the turd at the end of the game.

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Feb 28, 2020

Great thread. I've been very unimpressed with most VCs in the DTC/D2C/DNVB space - their fundamental thesis doesn't make much sense to me but I don't care when I'm flipping them overpriced stock in a Series A or B.

Conversely, almost everyone I've talked to on the PE end of things is brilliant.

Feb 28, 2020

The line between VC, PE, and activist HF is pretty blurred now. It's less about the product focus but the tier of firm, IMO.

Feb 29, 2020

How would you say they are blurred? PE and VC maybe but how with activist funds? Not saying you're wrong but definitely interested in your view here

Feb 29, 2020

A lot of activist HFs have started investing in private markets.

Feb 28, 2020

In VC (Series A-C) well.

I would add - there are folks who have been in the venture for a while (both long-standing institutional funds and emerging managers who have done this job befor) and and there are the "tourists" - corporate venture firms, new managers with little price discipline, etc. (Softbank, ahem...) that are responsible for 90% of the terrible behavior/lack of diligence you hear about.

There is an assumption that VC is about throwing money around and praying for exits. And there is some element of that (it is more of a random walk than other asset classes), but the best investors are very thoughtful on market/technological trends and evaluating early stage teams and founders, as well as (when available) assessing/extrapolating early unit economics and sales velocity.

I think the issue I see PE folks have is that a lot of this is more qualitative and nascent pattern matching. Our worlds couldn't be more different.

For example, a lot of my assessment (my background includes product management) in one of my earlier investments that is doing well was understanding whether the market would eventually want in 3 years what the team had on their product roadmap, and if the engineering org was capable of delivering upon that.

This is VERY hard for many folks who work in banking to understand. We also DO look at early product metrics, do customer references, and often check underlying unit economics. But ultimately it comes down to market + team and many good VCs have an incredible ability to pattern match.

Someone also said this earlier, but in a low growth world- growth is priceless for acquirers and investors. Many acquirers have zero software DNA and ability to innovate but can take on burn - they have a massive install base to cross-sell a new startup's products into. I was just in three straight Corp Dev meetings with an acquirer for a $30M+ ARR asset, and no one asked about unit economic efficiency - they asked for top-line growth and dug in on product. It's obviously not black or white (you can't usually have negative unit economics in B2B software and keep getting funded) but should show you there's more nuance here.

That said, the asset class is probably 25-30% bigger at the early stages than it should be rn - there are too many firms chasing the same number of good deals. Term sheets now get written in 2 weeks (or less!) whereas I know that used to be much longer.

Again, this is for early and early-growth stages (A-C).

Venture has many, many different flavors.

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Feb 29, 2020

Here's a question I've been curious about which I feel you could answer given your experience. Given a lot of diligence and biz evaluation is revolving around a lot of scaling factors, how do you as an investor evaluate or toe the line between growth accelerated by heavy spend or a path to cash flow generation? May be a bit broad but happy to provide more color where necessary

Feb 29, 2020

It depends on a few factors.

First - there's this weird assumption that ALL VC backed businesses have negative unit economics. This isn't true - a business can be cash flow negative but still have positive LTV/CAC, payback period, etc that signal a business capable of scale.

We guide a company to be cash flow positive typically when
- We want to control the exit path/optionality of the company (don't want to be forced to exit/dilute wth another round)
- The competitive dynamics in the market don't necessitate a winner-take-all (i.e. being #2 or #4 in that market is still an attractive exit)
- or the company is growing efficiently without significant burn, and we don't feel the need to accelerate growth more efficiently (or we don't feel the company has a good plan for the use of funds)

Hopefully that helps?

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Feb 28, 2020

How common is it for earlier stage VC's to launch later stage funds that then invest in portco's of the same VC's earlier stage fund? I know at least one of the big valley firms did this recently but feels like that's also a signal of too much money having been thrown into early stage deals. But curious if that's the wrong read, and how common it is.

Feb 29, 2020

What I've seen - It is rare to raise a separate, large "growth" fund to pursue this. Some larger firms (Sequoia, Battery) do but often times growth arms will be quite separate.

Some raise "Opportunity Funds" (say, $25-30M in addition to a $200M fund) to follow-on (double down or maintain pro-rata) in existing investments that are doing well.

The vast majority of early stage funds simply reserve follow-on $ as part of their fund size. So a $500M Series A/B fund will reserve, say $50-$75M of that for follow-on investments.

Firms that are solely seed stage dynamics can be very different.

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Feb 29, 2020

Thanks. Yeah I was definitely referring to an opportunity fund. That's what they called it and matches your description. Guess it's at least common enough to have a name.

Mar 2, 2020

Just curious- what is the primary benefit to the larger guys (e.g. Sequoia, Founders, Battery) who raise the separate growth fund? wouldn't it be easier to just go through 1 fundraising process and save $Xmm for ongoing rounds to maintain pro rata ownership like how you say most approach this? Seems like these guys would have the track record to raise enough money for that extra cushion

Feb 29, 2020

I think looking at a report that indexes performance of all VCs is the wrong way to understand the VC industry.

  1. The top 5% of VCs generate 95% of returns in Venture Capital asset class. This has stayed roughly the same for 30-40 years and rightfully, it means the top 5% of VCs are not a laughable shitshow, the rest, maybe yeah. To know if VC industry is in dipshit, we should look at the performance of these top 5% of VCs. For the past 10 years, the top 5% of VCs in the two of the world's largest venture markets (US & China) has delivered outstanding returns. In China, ever since the emergence of mobile payment in 2015, LPs saw many '10x funds' (net to LPs) with companies such as Xiaomi, Meituan, Didi, Kuaishou, Pinduoduo, Bilibili, Bytedance etc. Meanwhile in the US, we have household names Snapchat, Uber, Whatsapp, Flexport, Unity, Twitch, Slack etc. Data tells us that for the past 10 vintages, sure there were ups & downs, but Venture investment (if done right) has delivered stronger outlier returns than any other asset class I dare say. Question is, can they repeat this peformance next 10 years? Increased fund sizes is indeed a challenge now but at the core, its about their view of how the world will change in the next 5~10 years and the assessment on the how big the opportunity set is (market inefficiencies, sector, talent pool, technology etc.). This is what makes VC so fascinating and concentrated on the top tier guys. Because the people who has the right capability, vision and balls to start the next big thing stick around like-minded people (including investors). And based on the current rate of technological progress in TME/biotech, i'm pretty confident that next 10 years will look very different from today and the top tier VCs will be there to capture the change makers.
  2. The key difference between a 2-3x VC fund and a 5-10x VC fund is not about the number of unicorns they invest in, its about portfolio construction. A $50Mn seed fund can invest $500K into 80 companies, maybe hitting 3 Unicorn jackpots. But the fund is still a failure if it does not follow-on aggressively in subsequent rounds of financing to maintain meaningful ownership in these 3 unicorns (otherwise it will be heavily diluted). Think, owning 0.5% versus 5% of a $2Bn company makes a world's difference to the fund level performance of the VC. And this is assuming they hit THREE unicorn level companies, god fucking knows how difficult that is. My point here is that its not always about whether the company is Facebook or Google level, but to a large extent how to maximize returns through optimizing portfolio construct in the fund's value drivers. A portfolio of 30 subpar companies can generate higher fund level return than a portfolio of 50 companies with 3 unicorns. In the VC world, an investor's judgement on which portfolios to double down is perhaps much more important than its first cheques. Its no easy task when all your portfolios are your babies and you have to make such important decisions at early stages (as an earlier comment said, there is a fundraising compression cycle; companies raising capital faster when operational metrics have yet to catchup). It also sends mixed signals to later stage investors if the VC choses not to follow-on. It may hurt relationships. Now of course, if a VC consistently misses the best/largest companies in the vintage, but still delivers a 5~10x fund as they secure very high entry ownership, are they still a good VC? This is another topic for discussion.
  3. **Venture capital has a lot in common with wine-making **- you cannot switch into and out of wine-making, it's a decision for your life (probably that of your children). To enjoy the maximum returns of venture capital, you have to endure across strong and weak performing vintages. Most probably in the early years you produce a lot of 'vinegar' and if you give up then, this effort will go entirely unrewarded. Even later, some vintages will be a disaster. But your wine cellar will help you to bridge these downturns and the spectacular vintages will make the effort worthwhile. You will eventually sit in the evening and enjoy your glass of wine.

If you think deal quality is bad now, perhaps 2 years later things will change and if you leave today, you won't be well positioned to capture those opportunities.

Feb 29, 2020

Yes, seems it's difficult for VC to reliably generate decent returns. I wish it wasn't so, since society needs the technological innovations and job/company-creation that VC stimulates.

Mar 2, 2020

Threads like these are why I frequent WSO. Props to all the contributors.

Mar 2, 2020

Having worked in both public and private markets, sell side equities, buy side long/short HF, and now as a VC - my 2 cents:

I do agree that there is an overabundance of capital in VC, particularly with tourist VCs and especially Softbank warping valuations but the OPs comments seem to lack understanding about the asset class and why VCs exist in the first place. Also, to Neil91 - totally agree about the public side and most active managers do underperfom.

Another issue I have with the public side is what value to active managers add to the ecosystem? Is beating a long only benchmark by 100bps a year really that valuable or eeking out single digits on absolute return and charging 2/20? Not very many funds can put up anywhere close to 10%/year. From the company perspective, investors are a huge time suck for company management and running around appeasing shareholders who are often short term is probably not the best use of their time and many meetings can be adversarial. A good VC can enable a motivated founder to orchestrate a growth trajectory far beyond what they can do alone and create value for employees, customers, and investors. Before bashing VC, maybe get more perspective about what happens on a board level.

What grabs a lot of headlines about the downsides of venture often come from a point of misalignment. Many companies shouldn't get venture funding in the first place. Their businesses are just not that viable. When they do raise, it can often be on bad terms that often result in binary outcomes from VCs who might not be aligned. From a personal perspective, working in VC is far more rewarding from the standpoint of working with entrepreneurs and not just churning out alpha.

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Mar 2, 2020

You're assessing venture capital in the wrong context; i.e. absolute returns in VC probably never have and will likely never be equivalent to that of PE; VC LPs are not in the hunt for strong and stable risk adjusted annual returns - they are there for the chance at a 100 bagger. This obviously entials more risk, and from a purely fundamental perspective of course traditional PE is going to outperform VC, yes its probably a better business model. But the upside isn't the same.

Mar 2, 2020

This is a phenomenal thread. Thanks a lot to everyone contributing.

Mar 2, 2020

Recently had a similar discussion with a large household-name family office. They ONLY invest in VC, but that's because they have access to the top 1/2 decile names.They have been in Sequoia since the magma cooled and the dinos roamed. So for them, it's a virtuous cycle of getting into the top tier funds. They've made a killing, so will just keep doubling down on VC. And because of their long-term multi-generational view, they can afford the duration. I offer this only as an interesting tidbit - I don't disagree with OP's premise.

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Mar 2, 2020

Can we at least agree that VC/growth capital has got to be the most interesting job out there? You get to research industries and their dynamics, the company, products/services, and technology. It's exciting stuff, even though returns seem less than ideal

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Mar 3, 2020

Yes and no. All my VC friends are constantly complaining about how you can't project and properly value a company with negative free cash flow. It's all just a gut feeling and I would hate that part of the industry. That said, I do see your point. The market research is probably very interesting and the network you build is more than likely a great crowd to know.

Don't @ me

Mar 6, 2020

I guarantee your "VC friends" aren't complaining about how they can't value a company with negative free cash flow. Diligence work isn't done looking at financials, it's more about building a case that the company has what it takes. It's like building a thesis, you want to see if there is sufficient evidence for product validation, elements of business model validation (depending on stage), sufficient capital access, sufficient market size & problem validation work, the right & complementary team, that your network can meaningfully help them succeed, and that there are no red flags. Projected financials are only looked at to see if the founders have lost their mind when making assumptions about how they are going to scale.

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Mar 3, 2020

Great thread here. I don't know much about LPs investments, but it seems like their investment on VC funds is similar to the VCs investment on PortCo?

For LPs, they need to invest in top tier VC funds or emerging VC managers, and for VCs, they need to invest in high growth startups at later stage or find emerging startups in the early stage (pre-seed, seed, series A) to make the desired return.

Mar 3, 2020

For sure. Same is true in PE and IBD. It's all about access - to the best tech co, best VC, best private deal. It is often no secret who the prettiest girl is. But do you have game enough to close?

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Mar 3, 2020

A lot of barely dressed "Living my best life [BLESSED EMOJI]" Jumeirah Beach Dubai sluts aka Instagram models have "Venture Capitalist" in their About Me section right next to "Entrepreneur", "World Traveller" and "Artist". I'll just leave this here and let you decide for yourself.

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Mar 3, 2020

^I work in VC/Growth and while it's intellectually stimulating I think people greatly underestimate the rate of failure/turnover and how competitive it can be.

I also think people assume you get to write checks, make calls, etc when for most top firms you are either sourcing or a glorified chief of staff to a partner for 3-4 years and you get asked to leave for a startup (admittedly this is still a good option - you usually get to pick).

ex-Lightspeed partner has a great blogpost that says that you have to be sure about entering VC because you can "waste a lot of time"- i.e. if you're a great VP of Finance, Product, Marketing (versus an amazing investor) it's possible to wake up after 4 years of venture and feel "well-networked" but without a real skillset.

Mar 11, 2020

Curious to hear more of your background and how you broke into PEVC. I'm in convos with early stage funds in NYC/SF and am wary of this. As someone with 2-4 years of experience I figured it could be a good place to hang my hat for a bit. Curious your thoughts.

Array

Mar 11, 2020

PM me.

Unless it is a Tier 1/Tier 2 shop with upward mobility and great GPs, I'd be skeptical. If it is that is fantastic and those roles can be career-making.

Mar 3, 2020

But surely not all VCs are shitshows. The same top decline funds keep showing up year after year. Sequoia in particular is an admirable name that has not only been noted as the top investor, but has also managed to be pan-generational, allowing their magic to be perpetuated thru successive generations of new firm managers. I'm told it's quite systematic; the Sequoia partners have much of their comp locked up in the Heritage Fund, which they can be kicked out of if they stop contributing or fail to step aside and make room for the next crop of partners. Someone can help fill in the gaps if I'm wrong.

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  • VP in PropTrad
Mar 3, 2020

i've got an idea for an enterprise software startup...$150 billion per year industry...i think my software (once complete) can save them $1-2 billion per year. That should equate to 100mm+ revenue per year when ramped up. i'm looking to raise 1st round of pre-seed capital to fund a development team.

I think i need to raise 500k to fund 1st year of development...ideally 1mm so i don't need to raise again.

I've never raised capital before.
How do i go about it?
Who should i pitch?

there are so many VC funds....and i have no idea how to wade thru the ocean.

i'm just a software developer with an idea and a market that needs serving.
thoughts?

Mar 6, 2020

There are a lot of good resources out there, but your first step isn't to go to a VC firm. Raise some money from friends and family, go do your customer discovery work, validate your problem, build a prototype. If you think there's something there, then you go to angels (they aren't sophisticated, so them investing doesn't mean you have something good), with this money you can build your MVP, and get your first clients. Once you demonstrate enough early traction, well validated your problem & solution, then you can start having talks with VCs that invest in your space. It takes 8-12 months to raise a institutional round of financing, so you want to start discussions early.

Mar 11, 2020

Sure, but sequoia gets access to the best deals because, well, they're Sequoia. Most times, first vintages do the best and often times blow sequoia, a16z, etc. out of the water. Look up IA ventures fund I

Array

Mar 3, 2020

Does anyone have any insight on biotech VC?

Mar 6, 2020

I spent a bunch of time in medical devices, healthcare IT & B2B data-driven SaaS VC investing (Seed - Series A), so take what I say with a handful of salt. Biotech & pharma VCs are generally a totally different breed. Their funds are much bigger, and their investment horizons are much longer. (4-6 years for a traditional VC, 10yrs+ for a biopharma). Risks are very well defined, regulatory process is crystal clear, deep domain expertise is required to be an investor in this space. Personally, I think it's a really boring area of early stage investment, but if you have a strong medical, chemistry, or biosciences background, know your way around the regulatory approval process, and a bit about finance, you could be a successful biotech investor. That said, there are types of biotech firms that don't have such a wild time horizon, but as with all deep tech, it's early and very risky (more than usual for VC).

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Mar 5, 2020
FailedInFinance:

I see a lot of idiots getting 8-figure funding for ideas that are borderline-retarded at best.

Mar 5, 2020
FailedInFinance:

I see a lot of idiots getting 8-figure funding for ideas that are borderline-retarded at best.

A recurrent thought I've had. A theory is that untalented people with expensive tastes want to be a boss, take a large salary, enforce their own rules / culture in the workplace, and the like. I'm thinking of truly mediocre start-ups.

Mar 6, 2020
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Mar 13, 2020