Sounds like a Ponzi scheme :D
But in all seriousness, we all know lots of companies would not exist without VC.
For reliable excess returns, VC funds need 500 investments
51–60 of 68 posts
Re: For reliable excess returns, VC funds need 500 investments
#52My takeaways from the article: (1) VC is a casino for the rich and just like gamblers in casinos they have no idea what they are doing; (2) VCs have discovered that standard deviation shrinks like the square root of the sample size, however their understanding of stats seems to be just enough to run a monte-carlo simulation. Edit: the 3rd takeaway is advice to those who're considering to join a "startup" - if VC need…
I disagree. VCs are great; they are the backbone of our economy and are responsible for creating millions of jobs. A good VC is a huge value-add to any startup and provides valuable advice to aid the value-creation process and streamline the value chain.
> A good VC is a huge value-add to any startup
What does a good VC add that would be hard to get otherwise? The obvious counterpoint to your argument is that good VCs play primarily passive roles in comparison to the good operators they invest in, by a very wide order of magnitude.
Re: For reliable excess returns, VC funds need 500 investments
#53You can rephrase the headline:
For reliable excess returns, startup employees need to correctly choose one out of 500 companies.
Re: For reliable excess returns, VC funds need 500 investments
#54(I'm a VC.) I'm skeptical of simulations like this one because they typically assume that every startup has the same statistical distribution of returns, and whether you pick 15 or 500 startups, each startup will have the same expected value and variance. But in practice it doesn't work like that. A full time VC might see 2000 pitch decks per year, meet with a few hundred of those companies, and end up investing in 5…
Leo - as other folks have noted it is a major assumption to think that VCs are good at calculating the expected values of companies in which they make investments. The fundamental randomness is so high here that any ranking a VC made would likely be garbage - the sample size of investments is not nearly high enough to come to a precise viewpoint on expected value of one good deals vs another. As an analogy, if this was a regression the standard errors would be massive, so much so that each investment would not be statistically significantly different from one another in terms of expected return. I think it’s plausible that they’d be able to distinguish best from absolute worst, but best from slightly less good? No way.
I think a more realistic “model” of a VCs behavior is one of thresholding - set the bar somewhere and invest in any company that seems to be above that quality bar, with some stochasticity as to which deals you actually win in the end.
Re: For reliable excess returns, VC funds need 500 investments
#55Earlier quoted context omitted.
> just like gamblers in casinos they have no idea what they are doing I follow all of the VCs on Twitter and it's very clear from their many, many tweets that they have a far superior intellect than the rest of us which allows them to divinely predict the future. And between them and their diverse network of other 40 year old, white males they have a rich, deep understand of the customer's wants and needs. And from t…
ಠ_ಠ Not sure if this is sarcasm or not. I'm leaning towards sarcasm, but if there ever was a place where someone would say this with a straight face it would be HN.
[deleted]
Re: For reliable excess returns, VC funds need 500 investments
#56Earlier quoted context omitted.
You seem to be insinuating that a PE exit via a sale to another fund is somehow inherently bad. Many PE investors would argue the opposite - IPOs have lockups and price volatility that increase both certainty of exit and time to exit. A sale to another PE firm or corporate entity generally deliver a large onetime cash payment.
I think he is questioning if a company or IP is valuable if it is only changing hands between funds. As opposed to, let's say, the public.
A dual track (where you run an auction to both private and public buyers and simultaneously file an S-1 to IPO) maximizes the value to the seller. This sort of disproves the premise.
Re: For reliable excess returns, VC funds need 500 investments
#57(I'm a VC.) I'm skeptical of simulations like this one because they typically assume that every startup has the same statistical distribution of returns, and whether you pick 15 or 500 startups, each startup will have the same expected value and variance. But in practice it doesn't work like that. A full time VC might see 2000 pitch decks per year, meet with a few hundred of those companies, and end up investing in 5…
Leo - as other folks have noted it is a major assumption to think that VCs are good at calculating the expected values of companies in which they make investments. The fundamental randomness is so high here that any ranking a VC made would likely be garbage - the sample size of investments is not nearly high enough to come to a precise viewpoint on expected value of one good deals vs another. As an analogy, if this w…
Go backwards. How many IPOs have not had VC backing? Obviously maybe they grow slower, or maybe IPO bound tech firms are oversubscribed so it’s only an individual VCs prediction ability that’s wrong not the asset class as a whole, but still.
Re: For reliable excess returns, VC funds need 500 investments
#58(I'm a VC.) I'm skeptical of simulations like this one because they typically assume that every startup has the same statistical distribution of returns, and whether you pick 15 or 500 startups, each startup will have the same expected value and variance. But in practice it doesn't work like that. A full time VC might see 2000 pitch decks per year, meet with a few hundred of those companies, and end up investing in 5…
Leo - as other folks have noted it is a major assumption to think that VCs are good at calculating the expected values of companies in which they make investments. The fundamental randomness is so high here that any ranking a VC made would likely be garbage - the sample size of investments is not nearly high enough to come to a precise viewpoint on expected value of one good deals vs another. As an analogy, if this w…
Hey Namdi!
> it is a major assumption to think that VCs are good at calculating the expected values of companies in which they make investments.
It's not quite the same as proving VCs can calculate expected values well, but VC is one of the few asset classes with persistence of returns -- meaning having a top quartile fund is correlated with the next fund also being top quartile. In most investment classes, being top quartile across funds is basically uncorrelated. So good VCs tend to be reliably good and not good just because of pure chance.
Source: https://www.morganstanley.com/im/publication/insights/articl... (p 51)
> The fundamental randomness is so high here that any ranking a VC made would likely be garbage
A ranking doesn't have to be perfect, just better than random. E.g. let's say you give me a bunch of companies and ask me to rank them, and I put 60% of the actual top 1% and 40% of the next 1% into my top 1%. I'm making mistakes, but that's still pretty good. As long as I'm directionally right on average, I should do well on the investing side.
Re: For reliable excess returns, VC funds need 500 investments
#59Earlier quoted context omitted.
> there isn't a distinction between positive expected value financial games, versus negative expected value financial games except cultural tolerances Why not? positive expected value games seem like a much better thing to post your money into.
A national lottery with a positive EV would still make almost all players losers.
If you play at enough such lotteries with small enough bets, that sounds great. If the EV had been negative, not so much.
Re: For reliable excess returns, VC funds need 500 investments
#60My takeaways from the article: (1) VC is a casino for the rich and just like gamblers in casinos they have no idea what they are doing; (2) VCs have discovered that standard deviation shrinks like the square root of the sample size, however their understanding of stats seems to be just enough to run a monte-carlo simulation. Edit: the 3rd takeaway is advice to those who're considering to join a "startup" - if VC need…
> VC is a casino for the rich and just like gamblers in casinos they have no idea what they are doing
Except that the VC expected return is positive. They just need a sufficient number and diversity of bets to lower their variance to a small value relative to their expected return, which most of them don’t do.