Every venture firm reports the โvalueโ of each of its underlying investments. Typically, this is updated quarterly and sent to each of the fundโs investors. The idea is that investors will then have a definitive view of the value of the firmโs investments. Simple, right? But what is the โvalueโ of a private company? Turns out the answer to that question is not so easy to determine, and, as a result, valuation reporting in venture is a mess. Prior to 2007, most firms held company valuations at the price of the most recent round. This was relatively straightforward and generally pretty consistent across funds. The rationale for this approach was that the best indicator of value was the last โmarketโโฆ
Category
Venture Economics
The Future of Venture
Just before the end of the year, Erin Griffith of The New York Times published an article titled โWhat Is Venture Capital Now Anyway?โ Itโs a provocative look at the state of venture capital and, as these sorts of things are want to do, very quickly started making the round in venture circles as VCs tried to map how they fit into the landscape that Erin describes โ a split in how VC firms are operating: some firms are keeping to a smaller, boutique style while a handful are becoming behemoths, almost unrecognizable as venture firms. Thereโs very little in between. I think Erinโs description of how our industry is evolving is spot on. But this evolution in the ventureโฆ
IRR is a vanity metric
Iโm observing that IRR is a metric that is becoming an increasing focus in venture, replacing fund return multiple as the key metric of success. I understand the draw of IRR, and โ as a fund draws to a close โ thereโs no question itโs an important metric. LPs have plenty of options for where to put their money and IRR is an easy way for them to compare how their money grows across various investment options and a convenient way to determine whether they believe theyโve been adequately compensated for the relative risk and varying degrees of liquidity available to them across different asset classes. BUT (and you knew there was a but here given the post titleโฆ) itโsโฆ
VC Fund Returns Are More Skewed Than You Think
Some of the most popular posts Iโve written over the past couple of years were the two that focused on just how rare outsized returns for an individual deal are in venture capital. You can see the original posts here and here. In those posts I was analyzing data from Correlation Ventures that showed just how skewed venture returns are, specifically that 65% of investment rounds fail to return 1x capital and only 4% return greater than 10x capital. Ian Hathaway, who recently co-authored the second edition of Startup Communities with my partner, Brad, sent me the chart below which highlights how that translates to returns in venture capital as an asset class. Iโve seen versions of this chart beforeโฆ
Investing in Downturns
TBH, I havenโt been thinking much about new investments at the moment. Iโve been asked many times how I think the Covid-19 crisis will change investor behavior and fundraising for startups. I generally give the kind of answer I think most VCs give and say something about how we all know that down markets are great markets for companies to grow (lots of great companies have been started in downturns), that thereโs a lot of capital sitting on the sidelines at the moment and that capital will have to be invested, etc. All true, but I think not entirely well thought through in most cases. For example, I also generally point out that despite most investors saying this, the vastโฆ
The Markets Are Great . . . but Venture Outcomes Havenโt Changed Much
A few years back I blogged about the hard data behind venture outcomes and the challenge of creating a venture portfolio that produces strong returns. That blog post โ which turned into one of my most read posts ever โ grew out of a study done by Correlation Ventures showing the distribution of outcomes across over 21,000 financings during the years 2004-2013 as well as some of my own observations. The Correlation study produced a lot of interesting data and showed that the typical โ1/3, 1/3, 1/3โ model that many VCs talk about was significantly more optimistic than the reality of typical venture returns. The vast majority (almost 2/3rds) of venture financings fail to return capital. And only about 4%โฆ
How Well Do Founders Do in Venture-Backed Exits?
A few years ago I wrote two posts โ Venture Outcomes are Even More Skewed Than You Think, and Some More Data On Venture Outcomes โ that challenged the mythology that only 1/3 of venture-backed deals failed and showed just how rare large (10x and greater) venture returns really are. I think the sharpness of the curve surprised a lot of people and contributed to a bunch of discussion at the time around just how rare โventure outcomesโ really were. Not surprisingly, I was looking at the data through the lens of an investor and in so doing was only focused on how well investors fared in company exits (as a side note, Iโm hoping to update these data nowโฆ
Whatโs The Optimal Portfolio Strategy for a Venture Fund?
Last year I wrote a few posts (here and here) that talked about how skewed venture returns were. The key take-away graphic from that post is below โ outsized returns on venture investments are rare. Much rarer than most people realize. A key question my post didnโt consider was what the ideal venture portfolio might look like in the face of these data. Steve Crossan took a stab at modeling the answer to that question using the data from my Outcomes post. Itโs an interesting read โ you can see his full analysis here. Interestingly, we pondered this exact question at the very start of Foundry Group. Nassim Talebโs book, The Black Swan had just come out and we decided to read theโฆ
You May Have Too Many VCs On Your Board
Those that have followed my blog for any period of time know that I love the data that my friends at Correlation Ventures gather and write about (for example the data behind my post Venture Outcomes are Even More Skewed Than You Think or IPO or M&A). Today they released some data on the correlation between the number of venture board members around the boardroom table and the success of venture funded businesses which I thought was pretty illuminating and which confirmed a long held suspicion of mine. I havenโt counted exactly but Iโve been on dozens and dozens of venture funded boards in the almost 20 years Iโve been a venture investor. Some have been fantastic. Some have been dysfunctional. Mostโฆ
The Changing Venture Market In 3 Images
Want to visualize how the venture funding market is changing? Look no further than these 3 slides (from a presentation put together by our friends at Greenspring). I donโt think much commentary is needed here. Average round size at Series A is increasing dramatically. Venture is being increasingly driven by large rounds (especially at the later stages โ this is significantly skewing the overall funding numbers that are being reported). IPOs are the new Unicorns (theyโre becoming more scarce than their $1BN valued cousins)