Fred, these are impressive results and to my understanding much better than average VC returns, which are negative, right? Don Dodge posted min-analysis some time ago where he wound up concluding there was a lot more VC failure than is normally thought.
There are elite guys like you and Jeff Clavier who "beat the averages", but isn't "making money" with startups an unrealistic expectation, since those VCs and companies that succeed are still around to talk, but those who fail are not blogging about the burgers they now flip to pay the bills?
I'm also noting that without "time" as a factor the return is not meaningful. 3x is easy....if you use a 15 year horizon!
rick
· 2 years ago
Impressive that you'd share this info. But if ya got it, flaunt it.
Dr. Hodge
· 2 years ago
Hi fred, I'm the founder of a startup seeking 400k in seed funding I look forward to tomorow's post. I know having the big idea, proprietary software, solid contracts and just the ning and the team is critical. Take a peek at www.personalpediatrics.com to learn about concierge pediatrics and Personal Pediatrics. Thanks, Dr. Hodge
Steve Kane
· 2 years ago
Hey Fred. Bless your soul (as usual).
Curious: are there any common characteristics in the various deals/buckets?
For example... deals with >$10MM total invested (by all VCs) mostly had similar outcomes (and deals with <$10MM total invested mostly had similar outcomes)?
Or, deals that had strategic investors had similar outcomes?
Or, deals that had an advertising business model?
Or...?
Dan Primack
· 2 years ago
Glad to see Jeff is teaching that class. I recently spoke at a b-school class going the other way: Teaching MBAs how to best deal with (albeit not become) the media. Something too few entrepreneurs, CEOs, VCs, etc. really understand...
Scott Lawton (Blogcosm)
· 2 years ago
Fred: great info, thanks! Hard data like this is very helpful for entrepreneurs.
Dan: sounds like a good subject for a post. (Or, include a link if you've covered it in the past.)
Thomas
· 2 years ago
Do VCs talk down their failure rates in order to justify higher equity positions? If the math really is 40% 40% 20%, then that might have implications for floor valuations VCs can accept...
fred wilson
· 2 years ago
i think the average for early stage startups is 1/3, 1/3, 1/3. You have to be able to get 5-10x on your money on the deals that meet expectations for the numbers to work.
That's what drives valuations.
Live Crunch
· 2 years ago
I just explained on Tech Crunch about the business plan situation, I mean you got to ask your self every single question before you even start business, people think that if somebody else did it why can't I ? Well that somebody
A. Got lucky ( cool domain name, had supporters etc.)
B. Wrote good business plan
C. Had backup plans
D. Layout the operational management structure.
~ Live Crunch
mike
· 2 years ago
jeez Fred - you only made 6 investments from 96-98? You blew the chance of a lifetime! ;-)
bernard lunn
· 2 years ago
This kind of transarency is so welcome in the VC world. I assume investors are comfortable with it because the numbers are good. For the entrepreneur it makes a huge difference to building trust and a productive relationship. One point of friction between entrepreneur and VC that I have seen is based on the fact that a VC is hedged by having a portfolio whereas as the entrepreneur's financial health is totally tied up in that one venture. So when a VC wants to "shoot for the moon" to get that 10x return, the risk to the entrepreneur needs to be considered. These issues are all toally resolvable within a relationship based on transparency and trust. Kudos to you for showing real leadership in making that happen.
aaron
· 2 years ago
Interesting read.. /ac.
rk
· 2 years ago
I think in a world of increasingly smaller investments to get a net company started and increasing number of net startups, the measure of a vc's career success should be net dollars returned overall vs failure od success in terms of number of deals.
For example, you could put $200k in 5 deals and make 5x on each and still lose $10m on one deal and have a negative return on an overall dollar basis but a great record on a deal times return basis. Similarly, you could make 5 small bets that fail but one that performs well to get an overall 3-5x return. At the end of the day lp's want to know if you made more money overall than their investment and if it beat their alternatives to deploy capital.
Dennis Eusebio
· 2 years ago
Mind posting this on Only Human? Its a site that allows people to share their mistakes in hopes of helping others. You don't even have to sign up to post your story.
I think our users would love to hear more about your experiences.
I'll keep this brief, to let someone with better knowledge of stats improve it, and provide less opportunity for them to jump all over me...
One question is to ask whether you're really doing well or if your performance could be due to chance
For example, and this is just an example analysis, suppose we model the return of an early stage investment with an exponential distribution. Your initial assumption is that the average return will be around 3.2x, so we can pretend that each investment is an exponential random variable with mean 3.2 (and hence lambda parameter 1/3.2 = 0.3125).
You're counting 26 deals. If we take the sum of exponentially distributed random variables, the result follows the Erlang distribution. The Erlang dist has a mean of k/lambda (where k is the number of exponential random variables being summed). For k=26 lambda=0.3125, that's a mean of 83.2. Plugging in approximations for your returns, you have 11x7.5 + 10x2 = 102.5 in total return. So you're well above average, given all assumptions. But how far above average is that really?
The variance of the Erlang dist in your case is k/lambda^2 or 26/0.3125^2 = about 266. So the standard deviation is sqrt(266) or about 16.3
Without going into p-values and Null Hypothesis (I'm about to get on a 6-hour late plane, I hope), that places you just over one standard deviation away from the mean of that distribution. You can use the probability distribution function of the Erlang dist to see just what proportion of samples would be further from the mean, etc. But given the number of assumptions already, it may not be worth pressing on. One standard deviation away from the mean is nice, but it's also fairly inconclusive. We'll just have to give you the benefit of the doubt, I guess :-)
Did I say already that there are a lot of assumptions in the above?
BTW, I've been planning a blog entry on figuring out how good you are at something, and comparing that to efforts in totally different domains (was Babe Ruth a better hitter than Tiger Woods is a golfer?) and it's based on number of standard deviations from the mean.
Terry
Michael Rivers
· 2 years ago
Fred
Thanks for opening up an interesting discussion, which recalled a study I read earlier this year by Juan Villalobos of Angel Venture Partners of success rates in early-stage investments: http://tinyurl.com/yunza3.
Michael
Himanshu Sahani
· 1 year ago
Hi Fred,
Not sure if I understand this clearly, but when you say 1x or 5x times return on capital invested, is that within a certain time period associated for the return to get counted? For example when you say "Three of the unrealized deals are 1999 vintage Flatiron investments which will almost certainly end up in the 1x to 5x category" what timeframe are you looking at?
Thanks
HimS
Investblogger
· 1 year ago
Hi there,
My name is Ethan Suplee , I just signed up. I hope, I am posting in the right section, and I am sorry, if I posted in the wrong place,
moderators, please move this post accordingly.
Early last year, I stumbled upon information about
investment private clubs, that are not readily available to the public. The yields, which people could
receive by participating in such funds, appeared
surprisingly high at
first, but as I studied more about them, I began to make a lot of money. These days, I consider
Your initial assumption is that the average return will be around 3.2x, so we can pretend that each investment is an exponential random variable with mean 3.2 (and hence lambda parameter 1/3.2 = 0.3125). Thanks for opening up an interesting discussion, which recalled a study I read earlier this year by Juan Villalobos of Angel Venture Partners of success rates in early-stage investments
güvenlik şirketleri
· 1 year ago
One point of friction between entrepreneur and VC that I have seen is based on the fact that a VC is hedged by having a portfolio whereas as the entrepreneur's financial health is totally tied up in that one venture. So when a VC wants to "shoot for the moon" to get that 10x return, the risk to the entrepreneur needs to be considered. Güvenlik, güvenlik elemanları güvenlik personelleri güvenlik şirketleri.
helva
· 1 year ago
thank you
danışmanlık
· 1 year ago
thank you.
c programlama dili
· 1 year ago
thank you.
assembly programlama dili
· 1 year ago
thank you. assembly
mobilya
· 1 year ago
thank you. Mobilya dekorasyon
ankraj
· 1 year ago
thank you. ankraj malzemeleri
photoshop
· 1 year ago
thank you very much. photoshop professional.
photoshop proje
· 1 year ago
thx. man.
Bill Palmborg
· 1 year ago
Hi Fred,
Saw you open an dinterseting blog today when browsing for start up Venture capital.
What about this promise:
----------3-years' Recipe to get bigger than MasterCard or Visa ----------.
Stupidity !
So they once said to Bill Gates, IKEA/Kamprad and 100,000 others too.
----------
If you have a tool
--that makes online shopping 100% secure,
--that requires the eMerchant/bank/etc to 100% authenticate to eShopper BEFORE he leaves away his ID to the Black Hole we call the Internet,
--that detects if the eShopper is using somebody else's card BEFORE card holden even noticed of the card loss,
that stops distribution of personal ID for fake shopping or counterfeit cards
--that makes insiders, bogus webshops, wiretap and data breaches of no means
--that releases 25 mln webshops from each risk of fraud,
--that releases them from no more costs of heavy security systems and
a 50% reduction of the chargebacks.
do you join my opinion that this new plastic card gets bigger than MasterCard or Visa in 3 years if funded?
do we agree that an aggressive US bank wants to grab market sharew of the Payment Card Industry if the bank had a slaughter tool like this?
Do you believe Microsoft grasps this a competitive tool against Googles in case of controlling the payment process servers?
I believe it and I have invented/patented more than this.
All Comments
Fred, these are impressive results and to my understanding much better than average VC returns, which are negative, right? Don Dodge posted min-analysis some time ago where he wound up concluding there was a lot more VC failure than is normally thought.
There are elite guys like you and Jeff Clavier who "beat the averages", but isn't "making money" with startups an unrealistic expectation, since those VCs and companies that succeed are still around to talk, but those who fail are not blogging about the burgers they now flip to pay the bills?
I'm also noting that without "time" as a factor the return is not meaningful. 3x is easy....if you use a 15 year horizon!
Impressive that you'd share this info. But if ya got it, flaunt it.
Hi fred, I'm the founder of a startup seeking 400k in seed funding I look forward to tomorow's post. I know having the big idea, proprietary software, solid contracts and just the ning and the team is critical. Take a peek at www.personalpediatrics.com to learn about concierge pediatrics and Personal Pediatrics. Thanks, Dr. Hodge
Hey Fred. Bless your soul (as usual).
Curious: are there any common characteristics in the various deals/buckets?
For example... deals with >$10MM total invested (by all VCs) mostly had similar outcomes (and deals with <$10MM total invested mostly had similar outcomes)?
Or, deals that had strategic investors had similar outcomes?
Or, deals that had an advertising business model?
Or...?
Glad to see Jeff is teaching that class. I recently spoke at a b-school class going the other way: Teaching MBAs how to best deal with (albeit not become) the media. Something too few entrepreneurs, CEOs, VCs, etc. really understand...
Fred: great info, thanks! Hard data like this is very helpful for entrepreneurs.
Dan: sounds like a good subject for a post. (Or, include a link if you've covered it in the past.)
Do VCs talk down their failure rates in order to justify higher equity positions? If the math really is 40% 40% 20%, then that might have implications for floor valuations VCs can accept...
i think the average for early stage startups is 1/3, 1/3, 1/3. You have to be able to get 5-10x on your money on the deals that meet expectations for the numbers to work.
That's what drives valuations.
I just explained on Tech Crunch about the business plan situation, I mean you got to ask your self every single question before you even start business, people think that if somebody else did it why can't I ? Well that somebody
A. Got lucky ( cool domain name, had supporters etc.)
B. Wrote good business plan
C. Had backup plans
D. Layout the operational management structure.
~ Live Crunch
jeez Fred - you only made 6 investments from 96-98? You blew the chance of a lifetime! ;-)
This kind of transarency is so welcome in the VC world. I assume investors are comfortable with it because the numbers are good. For the entrepreneur it makes a huge difference to building trust and a productive relationship. One point of friction between entrepreneur and VC that I have seen is based on the fact that a VC is hedged by having a portfolio whereas as the entrepreneur's financial health is totally tied up in that one venture. So when a VC wants to "shoot for the moon" to get that 10x return, the risk to the entrepreneur needs to be considered. These issues are all toally resolvable within a relationship based on transparency and trust. Kudos to you for showing real leadership in making that happen.
Interesting read.. /ac.
I think in a world of increasingly smaller investments to get a net company started and increasing number of net startups, the measure of a vc's career success should be net dollars returned overall vs failure od success in terms of number of deals.
For example, you could put $200k in 5 deals and make 5x on each and still lose $10m on one deal and have a negative return on an overall dollar basis but a great record on a deal times return basis. Similarly, you could make 5 small bets that fail but one that performs well to get an overall 3-5x return. At the end of the day lp's want to know if you made more money overall than their investment and if it beat their alternatives to deploy capital.
Mind posting this on Only Human? Its a site that allows people to share their mistakes in hopes of helping others. You don't even have to sign up to post your story.
I think our users would love to hear more about your experiences.
http://www.weareonlyhuman.com
Hi Fred
I'll keep this brief, to let someone with better knowledge of stats improve it, and provide less opportunity for them to jump all over me...
One question is to ask whether you're really doing well or if your performance could be due to chance
For example, and this is just an example analysis, suppose we model the return of an early stage investment with an exponential distribution. Your initial assumption is that the average return will be around 3.2x, so we can pretend that each investment is an exponential random variable with mean 3.2 (and hence lambda parameter 1/3.2 = 0.3125).
You're counting 26 deals. If we take the sum of exponentially distributed random variables, the result follows the Erlang distribution. The Erlang dist has a mean of k/lambda (where k is the number of exponential random variables being summed). For k=26 lambda=0.3125, that's a mean of 83.2. Plugging in approximations for your returns, you have 11x7.5 + 10x2 = 102.5 in total return. So you're well above average, given all assumptions. But how far above average is that really?
The variance of the Erlang dist in your case is k/lambda^2 or 26/0.3125^2 = about 266. So the standard deviation is sqrt(266) or about 16.3
Without going into p-values and Null Hypothesis (I'm about to get on a 6-hour late plane, I hope), that places you just over one standard deviation away from the mean of that distribution. You can use the probability distribution function of the Erlang dist to see just what proportion of samples would be further from the mean, etc. But given the number of assumptions already, it may not be worth pressing on. One standard deviation away from the mean is nice, but it's also fairly inconclusive. We'll just have to give you the benefit of the doubt, I guess :-)
Did I say already that there are a lot of assumptions in the above?
BTW, I've been planning a blog entry on figuring out how good you are at something, and comparing that to efforts in totally different domains (was Babe Ruth a better hitter than Tiger Woods is a golfer?) and it's based on number of standard deviations from the mean.
Terry
Fred
Thanks for opening up an interesting discussion, which recalled a study I read earlier this year by Juan Villalobos of Angel Venture Partners of success rates in early-stage investments: http://tinyurl.com/yunza3.
Michael
Hi Fred,
Not sure if I understand this clearly, but when you say 1x or 5x times return on capital invested, is that within a certain time period associated for the return to get counted? For example when you say "Three of the unrealized deals are 1999 vintage Flatiron investments which will almost certainly end up in the 1x to 5x category" what timeframe are you looking at?
Thanks
HimS
Hi there,
My name is Ethan Suplee , I just signed up. I hope, I am posting in the right section, and I am sorry, if I posted in the wrong place,
moderators, please move this post accordingly.
Early last year, I stumbled upon information about
investment private clubs, that are not readily available to the public. The yields, which people could
receive by participating in such funds, appeared
surprisingly high at
first, but as I studied more about them, I began to make a lot of money. These days, I consider
myself being the successful
investor. My next step, is marketing field, so, I
made available the blog, which
shows detailed information
about real investment
funds. If you would like to see my
blog, [url=HTTP://WWW.FINANCESECURE.NET]click here[/url].
I would appreciate
user's feedbacks.
Your initial assumption is that the average return will be around 3.2x, so we can pretend that each investment is an exponential random variable with mean 3.2 (and hence lambda parameter 1/3.2 = 0.3125). Thanks for opening up an interesting discussion, which recalled a study I read earlier this year by Juan Villalobos of Angel Venture Partners of success rates in early-stage investments
One point of friction between entrepreneur and VC that I have seen is based on the fact that a VC is hedged by having a portfolio whereas as the entrepreneur's financial health is totally tied up in that one venture. So when a VC wants to "shoot for the moon" to get that 10x return, the risk to the entrepreneur needs to be considered. Güvenlik, güvenlik elemanları güvenlik personelleri güvenlik şirketleri.
thank you
thank you.
thank you.
thank you. assembly
thank you. Mobilya dekorasyon
thank you. ankraj malzemeleri
thank you very much. photoshop professional.
thx. man.
Hi Fred,
Saw you open an dinterseting blog today when browsing for start up Venture capital.
What about this promise:
----------3-years' Recipe to get bigger than MasterCard or Visa ----------.
Stupidity !
So they once said to Bill Gates, IKEA/Kamprad and 100,000 others too.
----------
If you have a tool
--that makes online shopping 100% secure,
--that requires the eMerchant/bank/etc to 100% authenticate to eShopper BEFORE he leaves away his ID to the Black Hole we call the Internet,
--that detects if the eShopper is using somebody else's card BEFORE card holden even noticed of the card loss,
that stops distribution of personal ID for fake shopping or counterfeit cards
--that makes insiders, bogus webshops, wiretap and data breaches of no means
--that releases 25 mln webshops from each risk of fraud,
--that releases them from no more costs of heavy security systems and
a 50% reduction of the chargebacks.
do you join my opinion that this new plastic card gets bigger than MasterCard or Visa in 3 years if funded?
do we agree that an aggressive US bank wants to grab market sharew of the Payment Card Industry if the bank had a slaughter tool like this?
Do you believe Microsoft grasps this a competitive tool against Googles in case of controlling the payment process servers?
I believe it and I have invented/patented more than this.
If you believe it - can we discuss it ?
Best Regards
Bill
bill.palmborg@privatpost.se