31–40 of 46 posts
If 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!
On 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 st…
This is what I don't understand. So often someone is in this position, dips their toe in the VC pool, and a VC says "here, have two million dollars but give me control." Then suddenly their formerly highly-profitable startup has to have 50 staff, a big office building with board rooms and lots of shiny glass, and before they know it they're living off successive rounds of funding then filing for bankruptcy, because a $1mil/quarter 1-man company can't magically produce $50mil/quarter from the same banner ads just by hiring 49 more people.
Why would you not just tell the VC "no thanks, I'm doing fine without interference"? Your company is real at that stage. The dollar signs being waved in your eyes by the VC are not.
In other words, the singular focus on survey data without a sharp focus on correct interpretation has killed the spirit of digging deep and understanding the VC setup, with the result that it's not very actionable or insightful.
If the findings were perhaps informed by cross referencing with a survey of others in the ecosystem who aren't VCs, the authors would probably have been more skeptical and possibly better educated on reality. It'd have been extremely valuable to go to entrepreneurs and ask.
Reading one of PG's essays provides a far more useful perspective.
The challenge with a generic survey such as this is that while it gives an (really long) introduction into how VC works, it misses all the subtleties. A better researcher would have looked into that, and turned this into a legendary paper. Why is that important? Because as a VC, decisions are the most important thing you make, and subtleties play a huge role in that. If you don't dig deep, then you're just documenting interviews rather than understanding and interpreting reality correctly.
What the authors should actually have focussed on is:
How do VCs really make decisions?
Earlier quoted context omitted.
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…
b) You can't generalize having magical abilities to pick top quartile managers ex ante. a) Some bigger LPs diversify across multiple VC firms and smaller LPs may access fund of funds (though very expensive). Either way broad diversification across VC funds is not significant in the industry. One reason is because VC fund returns and broad exposure to multiple VCs is not really the main point here - it is the startups…
a) I generally agree. I was just trying to illustrate why mean and median aren't great for analyzing asymmetric distributions.
On 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 st…
> Net, with the VC rules, by the time the VC is willing to invest, the solo founder is beyond willing to accept the check. This is what I don't understand. So often someone is in this position, dips their toe in the VC pool, and a VC says "here, have two million dollars but give me control." Then suddenly their formerly highly-profitable startup has to have 50 staff, a big office building with board rooms and lots of…
The below reflects enterprise, and probably in some form, consumer:
1. Seed stage is likely before growable revenue. This may still be an idea. If technology advances are involved, not just a CMS to power PoF (think university startups vs. most Y Combinators), there may be real capital costs (time, equipment, enterprise POC cycles, ...) before there's something growable. This is also known as turning a technical invention into an adopted innovation. A $500K-$2M seed grant for an AI/infrastructure/etc. company would often need that. Without it, they could only really innovate on stapling together other people's technology.
2. In growth stage, there's a link between money spent on sales + marketing + field engineers and generated revenue, and likely, adding bells & whistles to grow into nearby markets. At this point, first mover advantage gets pretty real. Even cooler, revenue should be predictable within some range, so as soon as sales KPIs aren't being hit, hiring etc. can be scaled back to reflect reality. Or, just keep growing because the market is worth it.
In both cases, the goal is to go big fast, e.g., world leader in 3-7 years, vs. the 5-10 year plan. This isn't necessarily about greed: dealing with competitive industry, the desire to work on big things, the desire to work on many things, hiring certain folks, etc.
Of course, if you can do all of the above with a PoF idea, great. However, if you're that good, maybe just pick the right numbers for lottery tickets and use the proceeds to start a research lab? :)
Earlier quoted context omitted.
> Net, with the VC rules, by the time the VC is willing to invest, the solo founder is beyond willing to accept the check. This is what I don't understand. So often someone is in this position, dips their toe in the VC pool, and a VC says "here, have two million dollars but give me control." Then suddenly their formerly highly-profitable startup has to have 50 staff, a big office building with board rooms and lots of…
Both of you seem to conflate seed stage and growth stage, where the latter is generally series A and beyond. The below reflects enterprise, and probably in some form, consumer: 1. Seed stage is likely before growable revenue. This may still be an idea. If technology advances are involved, not just a CMS to power PoF (think university startups vs. most Y Combinators), there may be real capital costs (time, equipment,…
In which case from all I can tell, essentially no VC in the country will pay any attention at all. That is, the startup didn't have traction significant and growing rapidly.
For university startups, okay, but have to look in detail at the project plans. As I mentioned, that's possible: E.g., the first version of GPS was a back of the envelope thing by some guys at the Johns Hopkins Applied Physics Lab. That envelope was converted to a project plan; the plan was executed and successful. Lesson: If look carefully, should be able to evaluate the project technology just on paper long before soft/hardware or traction. If the technology really is overwhelmingly powerful for some commercial need, then, sure, should have a successful company. But IT VCs won't look at the details and, instead, just want to look at traction.
For funding of on-going companies, sure, there is a big industry for that from later stage VCs, private equity, M&A, IPOs, etc. There to evaluate a company, make heavy use of accountants and lawyers.
On 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 st…
I'm a very stupid and naive person when it comes to this kind of thing, but if I were such a founder, I'd be a little worried that such a VC would invest in a direct competitor to me if I didn't take their check. Of course, they might do that anyway (and other's surely would,) but at least I can imagine competing better if I had more funding.
If it is really easy for others to duplicate or equal your work, then do some work that is not so easy.
Earlier 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?
It entirely depends on what you are looking to explain or describe.
Mean is appropriate for investment returns if you can diversify risk over many investments. Median is appropriate for looking at incomes in terms of social policy. 95th or 99th percentile might be appropriate when you are looking to ensure that your web server provides reliable response times.