I’ve been approached by my 50n friend to join his vc fund start up he is doing with a friend worth several hundred million. They plan to fund it with 100m of their own cash. They want me to handle investing side. I personally do not wish to go vc route so my plan is to tell them to wait for markets to fall. Go traditional publicly traded route or even ipo investing.
Can someone educate me on how these vc work? Pros and cons. How they do estimates? How to pick winners? How they are valued?
historical performance of vc. Probability of success for vcs on their holdings. Average fees.
I’ve been working for 8yrs now on this (vc models for valuation and winner picking). But your question seems really broad and I don’t understand why you’re asking? You don’t want to go the vc route, but want to understand the vc route, to give reasons why don’t want to go the vc route?
curiosity. i just want to get a sense of consensus. see if it matches with what i read. maybe get insider perspective.
i personally dont like vcs for several reasons.
not scalable. usually the investment size is small. larger you are, your returns will go down, plus you gotta do more work.
not a level playing field. returns are structured. certain people with connections will ahve more favorable terms.
most investments are failures. you’ll waste your time and look like a fool when the majority go bust. you’ll have 1 unicorn to da moon!
return by fund has a huge std. winner take all (top quintile). majority of funds do poorly. and the winner do extremely well due to that 1 unicorn. lol
Well, not to feed your vc biases, but yeah basically all that stuff and more, it’s a tough game.
We’ve got mad-geniuses roaming the halls, and they all tell us it is NOT possible to predict what will be a hit. So we’ve got tentacles all over the planet, large operation, over a decade, still nothing. The problem is always this standard deviation of returns. The little guys got it hard, I know a couple, and they aren’t getting anywhere. We scaled up HUGE, and we’ve got the inside connections, but the problem, when you are this big you truly need a GOOG or FB (with a big equity %) to finally come out the winner. Yeah we’ve got dozens of minor wins, but the financial impact is dwarfed by the global operating cost. Also, there are a hell of a lot of made up valuations right now, people trying to show they got the unicorn, and then hot potato pseudo-unicorn, before the world finds out their tech is nothing.
I think it’s super interesting work. But would I put my own money in, or start my own? No f-n way!
fun facts. realtive to spy returns. during dot com bubble vc funds did really bad! during 2008 vc funds did extremely well. during the aftermath of a major downturn S&P 500 beats the median vc!
LOL at vc models for valuation. Also LOL at “working on this” - vc’s dont hire and dont pay for consultants or vodoo valuation models. So, are you working for a VC fund, brah?
Same way as how hedge funds pick winners whether it be stock, bond, or futures market.
So the answer is they don’t. VC funds just like any other active funds out there just ride the wave up and down with the market. Some get lucky but most don’t - stuck in perpetual under performance by couple hundred to several hundred bps.
This post is equivalent to asking, “I got approached by an equity hedge fund, should I join them? What is their performance like and how do they pick ‘winners’ and how do they value companies”…
It’s not performance that keeps the fund going…it’s about who does the owner of your fund play golf with on weekends?
That’s reality. The funny thing is, on the inside I always hear how they CAN’T actually pick winners because nobody really knows what will be a hit, yet the external marketing is always that the fund has some “secret sauce” (geniuses who can pick winners). Everyone on the inside, including investors, knows it’s nonsense, but they invest…
…and that has brought me to the question, I wonder what ACTUAL returns are? I think it would be a difficult analysis, and nobody has paid me to do it. We just hear talking heads “oh it used to be 20%, and now you know, it’s more like 15%,” and that made up number someone pulled from some industry paper just gets dropped in our model, investors nod, and nobody questions it. But I wonder what the real number is? Valuations bubble up, and eventually a recession hits, fake assets are revealed, and all the illusionary wealth evaporates! LOL
Of course they do. How else are they going to exit from these nonsense assets? They NEED voodoo-quant!
it’s all a BS…these models, DCF, proforma, forecasting, stats models, quants, portfolio managers, economists, etc all a joke in a dark expensive suit with nice watches and hair with spectacular resumes. Yes, it includes myself and many others in AF but deep inside we all know it is BS…No one knows when and why the next bear, correction or recession is going to hit us…Those that did predict correctly back in 2007-2008 were lucky proven by their failure in subsequent years for bad calls of another market doom…
We’ve all read books and journals by Taleb, Medelbrot, Levy, even French and Fama themselves, etc…All these models we use do not work. Analysts, CFOs corporations, PMs at HF, VC, REPE all use some form of CAPM, discount rate, beta, etc…but the very underlying assumption, Gaussian, is deeply flawed…According to these models, the Black Monday event was 1 in 50 billion and events such as 2007-2008 is improbable even if the market stayed open since the birth of Earth…YET, we all rely on this model…So what we do is not skill but rather people skills ie network, friends, your school, where do you play golf and with whom?
it cant be the same. publics stocks typically already have history and earnings. its equivalent to purchasing the future earnigns and net worth of someone who already has a career.
vc’s are pre rev or no rev without a consistent strategy. there really is nothing to go on except who the founders are. its tantamount to making a bet on who will be a success in a class of college freshman with no earnings, exp, or type of major and are dead broke. you are essentially making a bet on their hs gpa and personality. so obvi you are going to go with the highest gpa who is really cool!
vcs typically give these students a student loan rate of say 10%, that is convertible to a huge chunk of their future earnings once they become successful. now obvi if you make a bet on that student. you are going to nurture them and give them guidance to make sure they kill it for you!
i think you missed my theme there…I summed it up a bit more on one thread above yours…
Maybe your VC fund is different but the two HF I’ve worked at and current PE fund I am at?..performance is lackluster yet billions AUM…All about who you know…The investors are not investing their money…they manage on behalf of some trust, pension, endowment, private bank, bank, etc. you scratch my back i got yours.
oh yea lol i totally agree with the networking part thats why i didnt even address it.
as for the future estimates. you are absolutely right. its all bs. but some are more predictable than others.
stocks you are essentially gambling on their ability to grow or if they arent growing then you are hoping they have a higher yield than a bond.
bonds on the other hand are pure math. the only thing you need to focus on is what are the odds they will default and if inflation will kill me.
futures is a casino! you are making a bet with another person. for you to win someone has to lose. its leverage, and the premium is essentially the interest you are charged to make that bet!
also on recessions. just to add. its very hard to predict when it happens but 100% it will happen so the longer its been the more likely it’ll occur, kidn of like an earthquake.
but the great thing about recessions is that everything goes down hard at the same time. when some stocks shouldnt go down as much. that is where you will make money!
