This is a really interesting question to ask, but survey-based responses only tells us how venture capitalists think they make decisions. Obviously this is a secretive industry but I think the far more interesting question to answer is around revealed preferences rather than self-assessment.
How Do Venture Capitalists Make Decisions?
11–20 of 46 posts
Re: How Do Venture Capitalists Make Decisions?
#12Given the dismal returns on the median venture capital firm, perhaps the criteria identified in the paper should be a guide to how NOT to make investment decisions.
median is wrong metric for an asymmetric distribution.
Excuse my limited knowledge of statistics, but I thought the mean is considered an improper metric for the "average" value of asymmetric distributions.
If not mean, nor median, what metric would you suggest to approximate a typical value?
Re: How Do Venture Capitalists Make Decisions?
#13function decide(marketSize) { if (Math.random()
Almost right :) function decide(connected) { if (connected || Math.random()
decision :: ([slides], hope, naivety, GSachsClient) -> greaterFool
naivety = foldl hope slides
map naivety GSachsClient
ah who am I kidding, I could never get the hang of monads anyway.
Re: How Do Venture Capitalists Make Decisions?
#14Surveying might yield skewed results. Perception is reality to outside players in venture capital. I actually wrote an article about what I (a Hacker) observed sitting on the other side of the table during my time working at a Venture Capital firm.
Check it (forgive the slightly tongue-in-cheek writing): http://www.techendo.com/posts/what-venture-capital-companies...
Re: How Do Venture Capitalists Make Decisions?
#15Given the dismal returns on the median venture capital firm, perhaps the criteria identified in the paper should be a guide to how NOT to make investment decisions.
median is wrong metric for an asymmetric distribution.
That's reasonable at a fund level, but when 50% of the firms have negative returns why do people use them?
Re: How Do Venture Capitalists Make Decisions?
#16Earlier quoted context omitted.
median is wrong metric for an asymmetric distribution.
Excuse my limited knowledge of statistics, but I thought the mean is considered an improper metric for the "average" value of asymmetric distributions. If not mean, nor median, what metric would you suggest to approximate a typical value?
Let's say that for a basket of 100 VC funds:
* 30 return 0.5X (i.e. half of the initial investment)
* 30 return 1X
* 25 return 3X
* 10 return 6X
* 4 return 10X
* 1 returns 20X
The fund class overall returns 2.4X, but the median fund is very underwhelming (investors just get their money back). The "average" fund return (2.4x) is also kind of underwhelming because that's so much worse than the top funds. However, if an investor either a) has broad exposure to multiple VC funds or b) has some insight that helps them pick out the top 20% or 40% of fund managers, then the asset class is a pretty good investment. I think a good evaluation metric for VC as an asset class would a combination of expected returns and variance, and how those two quantities compare to other assets like public stocks or bonds.
Re: How Do Venture Capitalists Make Decisions?
#17Earlier quoted context omitted.
median is wrong metric for an asymmetric distribution.
Excuse my limited knowledge of statistics, but I thought the mean is considered an improper metric for the "average" value of asymmetric distributions. If not mean, nor median, what metric would you suggest to approximate a typical value?
Due to the law of large numbers (LLN, either the weak or the strong version), the mean is what matters, and the median, mode, etc. don't.
E.g., in coin flipping, if assign 0 to heads and 1 to tails and flip coins for a long time and take the empirical average, then that average coverges to the mean of 0 and 1, that is, 1/2. Of course, here the 1/2 is not even a typical value.
Similarly, to estimate what a venture firm will return in the long run, just take the average of what they have returned so far.
Re: How Do Venture Capitalists Make Decisions?
#18[deleted]
Re: How Do Venture Capitalists Make Decisions?
#19If it's already a success in a global market, with a complete team, a fully complete product, clearly making plenty of money with tens of thousands of paying customers (we'd really prefer to see millions) and all risk removed then WE INVEST!
AND we want a board seat, 45% of the company and a bit of damn gratitude.
And a new CEO, the founders, well......who are these inexperienced bozos?
Re: How Do Venture Capitalists Make Decisions?
#20On page 2, the paper has
> In fact, Kaplan and Stromberg (2001) and Gompers and Lerner (2001) argue that VCs are particularly successful at solving an important problem in market economies|connecting entrepreneurs with good ideas (but no money) with investors who have money (but no ideas).
IMHO, for information technology (IT) venture capitalists (VCs), this statement about "ideas" is mostly wrong. One reason the statement is wrong is that VCs will rarely even look in any detail at an idea.
In contrast the US NSF and DoD will look very carefully at ideas, e.g., GPS, stealth, measuring the 3 K background radiation. So, will Ph.D. dissertation committees, reviewers at peer reviewed journals of original research, and more. IT VCs won't do such things.
IMHO what IT VCs look at is current traction, that is, users or revenue, and want that traction to be significant and growing rapidly. Then if nothing else is wrong -- team, competition, scalability, etc. -- an IT VC can get very interested.
So, the VCs want the idea already implemented in hard/software (usually software) and in the market and in front of users/customers.
In the world of VCs, the idea is not something from research, that could be in a peer-reviewed papers, etc. but is just a short description of what the business looks like externally to a casual observer, the common man in the street. That there could be anything from a research idea as the crucial core of the business, crucial for getting the traction, being defensible and scalable, etc., is just ignored.
So, suppose some IT founding team has the coveted traction. If they have lots of users, then the team should be able to run ads and get significant revenue. If they have lots of customers, then they should also have significant revenue.
With that revenue, there will be some serious question if the team should accept equity funding, that is, accept the terms, a Delaware C-corporation, the BoD, reporting to the BoD that can fire team members, etc. A C-corp and a BoD bring a lot of overhead.
Really, the example of the romantic match making service Plenty of Fish (PoF) starts to look more important as a example for IT startups in the future. PoF was long just one guy, two old Dell servers, revenue just from ads and the ads just from Google, and $10 million a year in revenue. As in
http://techcrunch.com/2015/07/14/match-group-buys-plentyoffi...
on about July 14, 2015, the solo founder Markus Frind sold out for $575 million.
If a solo founder has a good idea that needs mostly only software, then there is a good chance they can just write the software, bring it to market, get traction, and have revenue enough for rapid organic (that is, funded by earnings from revenue) growth.
That is, a solo founder who invented the idea can keep costs, time on communications, etc. low, write the software, go to market, and get the traction. That day is the first a VC wants to hear from that founder, and it is likely the last day the founder would be willing to accept a check, term sheet, etc. from a VC.
Net, with the VC rules, by the time the VC is willing to invest, the solo founder is beyond willing to accept the check.
Of course, if there are several founders, some high burn rate, maxed out credit cards, each of the founder with a pregnant wife, etc., then the VC's check might be more welcome.
But we need to understand: All across the US, entrepreneurs start and grow businesses -- pizza shops, auto body repair, dentist's office, etc. -- without VC investing. Then, the big difference for an IT startup is that some software and current computing, the Internet, etc. can let an entrepreneur make money much faster than a pizza shop. E.g., suppose the founder's business is a new Web site, and a lot of people like to connect. Suppose the site sends 10 Web pages a second with each page with five ads. Suppose get paid (from a report from Mary Meeker at VC firm KPCB) $2 per 1000 ads displayed. Then the monthly revenue would be
10 * 5 * 2 * 3600 * 24 * 30 / 1000 =
259,200