Wednesday, February 27, 2013

The Question(s) of VC Returns PART 1

As an investment analyst working in the public equity markets for many years and now an active early stage investor I know that comparing investment returns is a tricky business. For early stage investors that challenge is increased because what we put money into - an individual angel investment or a Venture Capital (VC) fund - is of course private. very limited public disclosure required. Researchers like the Center for Venture Research at the University of New Hampshire do a great job in trying to bring data and discipline to bear. But it remains a challenge vs. the tsunami of numbers investors in the public markets have to work with.

Bottom line ... early stage investors in my view need to be pretty careful when return numbers are bandied around. So many variables come in to play from sample size and composition to time periods etc. etc. And, if you invest in a fund, similar to other investment products you need to be careful about the impact of fees …, which can eat up a sizeable chunk of your returns.

In this context I was intrigued by the lengthy discussion on VC returns generated by a recent Fred Wilson blog post. With 375 comments on Fred's own blog alone the last time I checked!

The start point is publicly available data compiled by Cambridge Associates (CA). In particular look at the table on P3, which dissects VC returns over multiple time periods. Elsewhere the report also analyzes returns by fund specialty (biotech, internet e-commerce etc.) CA is a well-regarded source so I will take it as a given that the numbers they present are pretty accurate. (Although they are drawing on private data that is not amenable to outside verification.)

While comparative data in the report stacks up public market returns vs. VC returns if you look a little more closely you will see that you need to tread warily. This is because they position apples vs. oranges:
  • The CA VC numbers are a: "Pooled end-to-end return, net of fees, expenses, and carried interest"
  • The public market numbers are gross and ignore potential fees and/or transaction costs
Clearly given typical VC fee structure (2% management fee/20% carried interest) that can make for a big difference when you go from the gross return to the net amount actually realized by investors in a fund, namely the Limited Partners (LPs).

So two questions need to be separated out if you want to look at these as published VC returns and draw some conclusions vs. the performance of public market equities:

1. Looked at on a like for like gross return basis are VCs making good investments?

2. After fees are the returns LPs get from their VC investments competitive with public market alternatives?

I take a deeper dive into each of those questions in my next post.

Sunday, February 10, 2013

Mentor in The Room

An Interview with WIM

27TH JAN 2013
What’s the worst mistake a founder can make?
Many potential answers to this! Obviously this is situation dependent. But here’s one generic mistake: “following advice rather than taking advice.” Point being that founders can get deluged with advice - from peers, mentors, advisors etc. All is well intentioned BUT in my view founders need to listen, absorb, process and then use that advice as they judge best based on their circumstances and goals. Hence TAKE advice, don’t just blindly FOLLOW it.
What’s the most common Startup error?
I can’t claim to be able to answer this question convincingly either. But again errors at the business level are many and varied and depend on the specific context. What might be a dumb marketing move for one business say might be smart for another. Ironically, given the next question, as a recent Venture Beat article pointed out: “the most likely reason for startup failure is premature scaling.” Their conclusion: “Don’t invest in entrepreneurs that get ahead of themselves!”
What does “fail fast” mean to you?
If you haven’t done it already read “The Lean Start Up” by Eric Ries. He knows more about this than most people so gives a much better answer than I can. Or, if you want a pithy answer listen to Mark Zuckerberg who says: “Stay focused and keep shipping”.
If you could fix one thing in the startup eco-system right now, what would it be?
If we are talking about the NYC eco-system then … it seems in pretty good shape. However it still lacks the breadth and depth of financing for entrepreneurs that the Valley has. So, if I had a magic wand, I would conjure but some big money exits and seed the NYC system with many more cashed out entrepreneurs and others investors eager to recycle that capital back into the local start up world.
What should startups be focusing on in 2013?
What they focused on in 2012, 2011 - indeed since time immemorial. Namely - applying their energy and passion to an innovative solution to a real world problem. And delivering that solution with stellar execution.
When’s the right time to seek funding?
Mmmm, so many hard questions! First point would be that securing “money from strangers” provides benefits but also alters the balance in your business. So if you can achieve what you want by bootstrapping, maybe having some ancillary way of generating cash, then don’t rush out and get funded just because it seems cool. Founders need to remember in particular that once they have a Board they don’t just have a formal judge and jury watching over them … they also have a potential executioner. (Read Noam Wasserman’s Harvard Business Review article on the Founder’s Dilemma and work out where you stand … although perhaps best to re-gender the “Do you want to be Rich or do you want to be King” question.) Other than than other tips would be a) raise money in good time ie know your runway and act well in advance of falling off it b) take it when it’s available, you never know when funding might be harder to come by.
Thoughts on crowd-funding?
Personally I am wary because I think the erosion of investor protections inherent is dangerous. It is clear that, one assumes for the same reasons, the SEC is going to be slow (they already missed the year end deadline) on rule making because they have similar concerns. So, don’t count on this as way to raise money in 2013.
Best advice you’ve ever gotten?
You’re never as good as people think you are when you’re winning and never as bad as people think you are when you’re losing.
Guess who’s coming for dinner…who would be your dream dinner guest(s) and why?
As a Brit (dual national now!) I would love to have dinner with a younger (she is now 87 and failing) Mrs Thatcher. While controversial in many ways she saved the country from what seemed like irreversible decline. Also she famously said:  “If you want something said, ask a man. If you want something done, ask a woman.”

Read more at:

An Angel Investor's 3 Rules For Investing

New York angel investor reveals three personal, less standard, emerging “rules of the game” in investing in early-stage entrepreneurs.
By Adam Quinton (Managing Director, Golden Seeds & Angel Investor)
Pretty cool seeing two Women 2.0 posts on two companies I invested in (appearing on the same day) celebrating $1 million funding rounds forFlixMaster and The Muse, respectively. I signed up for these two last year, my first full year as an active angel investor, along with three other investments (EpiEP, Consensus Point and Thrive Metrics).
Seeing FlixMaster and the Muse (well done, Erika Trautman and Kathryn Minshew) on the screen got me thinking… what did these investments have in common? Was there any coherence to my investing approach? (I hoped so!)
Like most all investors, I am trying to identify compelling solutions to real world pain points that address big potential markets. So far, so obvious. But, stepping back, I concluded that three of my other personal, less standard, emerging “rules of the game” (hopefully successful ones) are as follows:

#1 – Diversity matters

I have always been a big believer in the decision-making benefits that stem from diversity of thought. When it comes to tech and on the gender front that means having one ore more women as a key players on the management team and as a founder/owners – in fact, all my 2011 class have women CEOs. (OK, The Muse is the exception that proves the broader diversity rule – with a three person but all-women co-founder team.
As a recent HBS article pointed out, all-women teams have superior collective intelligence to all-men teams!

#2 – Multiple founders

I can see more clearly now what at first was at first more intuitive. (And getting to know the data around this just reinforces the conclusion.) Namely that solo founders plough a lonely and tough furrow.
Multiple founders, and crucially complementary ones, are likely to have much better success rates.

#3 – Passion is key

When it comes to founders, yes their domain expertise matters to me. But passion and commitment matter I think much more than most of the resume. In fact, based on my (limited, I accept) early stage experience, some of the smartest ideas seem to come from people who have primary expertise in areas peripheral to their new business.
Maybe they have a greater ability to bring fresh and indeed disruptive insights to the table? (Exhibit A being co-founders Erika Trautman at FlixMaster and her husband Cameron McCaddon.)
It will be a some time before my rules of my game get validated or not but so far so good!

Read more at: