Takeaways from VC Investors' Strategies
Startup Growth and Venture Returns
The report calculates possible outcomes for VC’s who diversify their investments between many startups.
They analyzed thousands of VC deals. The math in the paper is good. The references are good.
The results show that VC’s obtain the best return by:
- investing in the early stage companies.
- diversifying their early stage investments.
Selected Quotes from The Authors
Our results suggest that each successive year of a company’s existence is worth less and less from the perspective of compounding investment growth. For instance, we can expect a company to grow about as much in years three and four, or in years four, five, and six, as it does in its first year.
Investing in Early Startups
Only the earliest investment opportunities are associated with the lowest, and therefore [the] most extreme [i.e., the most desirable, and profitable], distributions of returns.
Consequently, our results suggest that at the seed stage, investors should put money into every investment that clears some minimum threshold . Our research provides a principled quantitative underpinning for a broadly indexed “spray and pray” model of investing, at a company’s earliest stages … Consequently, it is entirely appropriate that later-stage investors should reject the “spray and pray” idea and be thoughtful and discerning when they participate, but also that those same investors are making an error when they take that restrained and nuanced approach to investing in the earliest stages of a company.
Calibrating and quantifying the investment threshold is a topic for future work. As a workable definition, one might consider something like “Is there a version of this company that could raise a Series A from a VC?”
Infinite Opportunity Cost
We ground our argument … in the idea that the opportunity cost of missing a winning investment is theoretically infinite, but this only holds at the seed round.
Series & Returns
… one of our most intriguing results: … that winning investors in a Series D round can expect very different returns than the winning investors in the Seed round of that same company, …
Startup Experiences With VC Investors In Miami
Startups can help reduce pointless detours by remembering two things:
- The AngelList analysis reveals a basic mathematical truth, with wonderful clarity.
- Most investor entities will not understand it.
We begin with the phrase from above: “ … investors are making an error when they take that restrained and nuanced approach to investing in the earliest stages of a company.”
Investors tend to have preconceived ideas about the right startup model, or related issues, such as:
- Insisting that the startup be offering some “tech-enabled” process (i.e., a business based on cell phone apps), or they will not discuss any further.
- Preoccupation with deal features such as “scaling” as a prerequisite.
- Not tech-savvy enough to assess the potential of a tech premise, and will not adapt, such as “We do not have the on-board [tech] expertise to evaluate the potential of your startup.”
- Heavy emphasis on certain types of business models, such as renting things.
- The old-era business model: product, marketing, sales, and competition.
To save time, an early stage startup must discover, as soon as possible, the entities, or the audience likely to be receptive to the startup proposal, AND THEN consider connecting with the entity. For example:
- Co-founder Laura Behrens Wu talked with over 100 investors. By the time she talked with Kleiner Perkins, she knew all the questions, and all the answers. First round was $2 mil, second was $6 mil, and the third was $20 mil. The business triples every year. Over 100 investors turned that startup down. This is the real life saga for a decent startup.
- Founder Eliam Medina left Miami and went to Silicon Valley in 2015 to develop his concept. He obtained funding from Silicon Valley to form his company, Willing, then returned to Miami to build his company, AND THEN, on November 20, 2019, Metlife acquired Willing.
- We are experts in prediction, with new math ideas. The only potential partner entities will be those who cherish first principles, and who are also quite knowledgeable about the true nature of securities markets. No other entity will be interested.
To save time, startups should pause and consider the value of “group” things which claim to support startups but often tend to be supporting some other interest, such as:
- Expos. Tend to be filled with people selling services or products. Few investors. If “investors” are present, a more expensive ticket might be required. The amounts can be exorbitant.
- Meetups. Tend to focus on vague subjects not related to core startup fundamentals.
- Pitch fests. Tend to be too rushed, and emphasize a formula presentation.
- Sophisticated “family office” organizations. Bait entrepreneurs into buying workshops, website setups, exclusive contact listings, etc., by implying the startup will have an opportunity to meet with a millionaire under arranged circumstances.
In the Founders’ personal experience, connections happen gradually. Some connections happen by chance. Others by word-of-mouth. Sometimes from introductions. Over a period of time, the view of “possible possibilities” morphs, and a direction becomes apparent.
When connecting entities have some core understanding in common, much like the “mutual self-interest” collaboration per Adam Smith, then there is value in:
- Making a slow coherent presentation.
- Asking the other person how they might view something.
- Talking back and forth – considering possibilities.
- Constructive collaboration.