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How VC Works – A Beginner's Guide

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Re: How VC Works – A Beginner's Guide

#21

Post by jordanpg »

bhupy wrote: post #19
jordanpg wrote: post #18

Earlier quoted context omitted.

I think the word "hard" is a bit overloaded in this thread. Yes, I'm sure VCs "work hard" in the sense of putting in lots of hours or doing demanding work, but really, who cares about that. Lots of people, up and down the socio-economic spectrum work hard in this sense. It's not a helpful distinction. And I'm not impressed by hard work in this sense. I have often wondered what it is, exactly, that VCs and executives…

> truly smart people are not wasting their time with work that is in any way associated with the movements of small green pieces of paper. What you call "movement of small green pieces of paper", others might call "resource allocation", which is a pivotal function in civilization-building.

I don't disagree, but I maintain that it isn't something that most of the best and brightest spend a lot of time thinking about.

The fact that the acquisition of lots of money is an end in and of itself pursued by a class of skilled "elite" white collar workers (like VCs) is basically a side effect of the "resource allocation" you mention run amok coupled with faulty wiring in our monkey brains.

Re: How VC Works – A Beginner's Guide

#22

Post by rmrfstar »

Havoc wrote: post #8

Nice explanation. The LP and GP parts feel a little wonky though >they don't run the VC firm (hence the term 'limited'). It’s from the concept of limited legal liability more than who runs it. Same for GP - generally just a legal shell. practically it doesn’t really do the stuff the article implies. The actual running of it is usually in a third entity (again to separate legal liability). And the carry sometimes goes…

[1] is a good resource.

[1] https://www.amazon.com/Mastering-Private-Equity-Transformati...

Re: How VC Works – A Beginner's Guide

#23

Post by xmot7 »

tasuki wrote: post #14

> VCs are expected to generate a 25-35% annualized return compared to the 12-15% that public equity markets generate and much higher than the 8-10% return that debt markets give. What does "expected to generate a 25-35% annualized return" mean here? Is that the mean/average annualized return of a VC fund? Or the "wished for" annualized return?

It's a very aspirational target. 25% annualized return (after fees) is a top decile fund. I've heard that number as a target before, but rarely and from investors that weren't used to the market. 12-15% from public markets is a top quartile hedge fund, still a great return but a little less aggressive than the VC number.

Re: How VC Works – A Beginner's Guide

#24

Post by jashmenn »

Even though a lot of engineers want to raise VC (or work for companies that have) the incentives are weird and it can influence your work/job in ways you might not expect.

When you take VC, you're given millions of dollars to build something huge, but it's also a Faustian bargain because you're limiting your range of outcomes.

You might grow a nice, profitable business, but if you can't 100x (or 1000x) their investment, your investors will be unhappy.

shameless self-plug: I just interviewed Sumukh Sridhara (AngelList Engineer, @vcstarterkit on Twitter) about VC from a programmers perspective on our podcast [1] and he's really, really good. If you're a dev looking to learn more about this, give it a listen.

[1]: https://podcast.newline.co/episodes/a-software-engineers-gui...

Re: How VC Works – A Beginner's Guide

#25

Post by mbesto »

Havoc wrote: post #8

Nice explanation. The LP and GP parts feel a little wonky though >they don't run the VC firm (hence the term 'limited'). It’s from the concept of limited legal liability more than who runs it. Same for GP - generally just a legal shell. practically it doesn’t really do the stuff the article implies. The actual running of it is usually in a third entity (again to separate legal liability). And the carry sometimes goes…

> The LP and GP parts feel a little wonky though

I think the distinctions the author tries to use are generally wonky, but otherwise, I think you are trying to take the pedantic legal view of the entities. Semantics here are important.

> Same for GP - generally just a legal shell.

Legally sure. In fact you might find all sorts of legal structures about how GPs and LPs operate ("Fund I LLC", etc). Colloquially, however, GP means "the party who actually run the fund day to day" and LP means "party who puts money into a specific fund".

Re: How VC Works – A Beginner's Guide

#26

Post by xmot7 »

jashmenn wrote: post #24

Even though a lot of engineers want to raise VC (or work for companies that have) the incentives are weird and it can influence your work/job in ways you might not expect. When you take VC, you're given millions of dollars to build something huge, but it's also a Faustian bargain because you're limiting your range of outcomes. You might grow a nice, profitable business, but if you can't 100x (or 1000x) their investme…

The return profile depends a lot on the stage of VC you're at - while a 100x return might be plausible for an early angel investor (who also expects 90% of their investments to go to zero), lots of later stage VC's will be quite happy with the more consistent 5x outcome.

Re: How VC Works – A Beginner's Guide

#27

Post by pbk1 »

xmot7 wrote: post #23
tasuki wrote: post #14

> VCs are expected to generate a 25-35% annualized return compared to the 12-15% that public equity markets generate and much higher than the 8-10% return that debt markets give. What does "expected to generate a 25-35% annualized return" mean here? Is that the mean/average annualized return of a VC fund? Or the "wished for" annualized return?

It's a very aspirational target. 25% annualized return (after fees) is a top decile fund. I've heard that number as a target before, but rarely and from investors that weren't used to the market. 12-15% from public markets is a top quartile hedge fund, still a great return but a little less aggressive than the VC number.

Under this definition, it would seem as if Andreesen Horowitz is not anywhere close to a top decile fund[1]. Does anyone know which ones are? Data on VC returns seems hard to come by.

[1] https://www.theinformation.com/articles/andreessen-horowitz-...

Re: How VC Works – A Beginner's Guide

#28

Post by BatFastard »

dustingetz wrote: post #20
jordanpg wrote: post #18

Earlier quoted context omitted.

I think the word "hard" is a bit overloaded in this thread. Yes, I'm sure VCs "work hard" in the sense of putting in lots of hours or doing demanding work, but really, who cares about that. Lots of people, up and down the socio-economic spectrum work hard in this sense. It's not a helpful distinction. And I'm not impressed by hard work in this sense. I have often wondered what it is, exactly, that VCs and executives…

The phrase "work hard" does not appear in TFA or parent comment Article is saying that VC is a challenging business

What is NOT a challenging business? If you can name 3 or 4 easy ones I will change professions! I hear being a dermatologist is easy if you can get thru med school, and get the specialty. But for that you only need to spend 15 years working really hard!

Re: How VC Works – A Beginner's Guide

#29

Post by mempko »

bhupy wrote: post #19
jordanpg wrote: post #18

Earlier quoted context omitted.

I think the word "hard" is a bit overloaded in this thread. Yes, I'm sure VCs "work hard" in the sense of putting in lots of hours or doing demanding work, but really, who cares about that. Lots of people, up and down the socio-economic spectrum work hard in this sense. It's not a helpful distinction. And I'm not impressed by hard work in this sense. I have often wondered what it is, exactly, that VCs and executives…

> truly smart people are not wasting their time with work that is in any way associated with the movements of small green pieces of paper. What you call "movement of small green pieces of paper", others might call "resource allocation", which is a pivotal function in civilization-building.

And if you haven't noticed, the climate crisis and the sixth mass extinction happening now signals a complete miss allocation of resources. Will we fall as fast as we rose?

Re: How VC Works – A Beginner's Guide

#30

Post by xmot7 »

pbk1 wrote: post #27
xmot7 wrote: post #23

Earlier quoted context omitted.

It's a very aspirational target. 25% annualized return (after fees) is a top decile fund. I've heard that number as a target before, but rarely and from investors that weren't used to the market. 12-15% from public markets is a top quartile hedge fund, still a great return but a little less aggressive than the VC number.

Under this definition, it would seem as if Andreesen Horowitz is not anywhere close to a top decile fund[1]. Does anyone know which ones are? Data on VC returns seems hard to come by. [1] https://www.theinformation.com/articles/andreessen-horowitz-...

For industry wide statistics, something like https://www.cambridgeassociates.com/wp-content/uploads/2018/... is pretty good. All returns there are gross, not net, but they show top quartile funds returning 15-20% gross over the last decade, varying a bit year to year.

For specific fund performance, I don't know of anything public. Most of the big names have had some funds with >20% returns, usually as they get bigger those get harder to maintain.

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