We need to shrink to have a healthy venture capital business. We have an industry that hasn’t delivered a multiple above 1.0 on invested capital since 1997. We have an industry that, as of end of year 2009, sunk to a negative ten-year IRR, with the bubble exits finally falling off the sheet. This is a sick business, and that is understandably leading to fewer investors wanting a part of it, which means outlays are shrinking. Eventually the industry will shrink back to a point where it delivers competitive returns — and it may even be there now.
Applying boring checklists to the investment process works. “Airline captains”, or those investment professionals in venture capital, private equity or stock investing that adopt a checklist method in their investment decisions, have a better track record because they control better our brain biases and common misperceptions.
Sure enough, when Smart tracked the venture capitalists’ success over time, it became clear that the airline captains had by far the most effective style. Those investors taking the checklist-driven approach had a 10 per cent likelihood of later having to fire senior management for incompetence or concluding that their original evaluation was inaccurate. The others had at least a 50 per cent likelihood. The results showed up in their bottom lines, too. The airline captains had a median 80 per cent return on the investments studied, the others 35 per cent or less.
For sure it is a tough sell, but I believe that using a methodical checklist-based approach helps guide our primitive brain to make complex decisions.
Chris Dixon adds more thoughts to the idea vs execution debate:
The reality is ideas don’t matter that much. First of all, in almost all startups, the idea changes – often dramatically – over time. Secondly, ideas are relatively abundant. For every decent idea there are very likely other people who’ve also thought of it, and, surprisingly often, are also actively pitching investors. At an early stage, ideas matter less for their own sake and more insofar as they reflect the creativity and thoughtfulness of the team.
Entrepreneurship is about execution, about building things, and that’s what venture capitalists are looking for in a pitch. I couldn’t agree more.
Hence the most important aspect of your backgrounds is not the names of the schools you attended or companies you worked at – it’s what you’ve built. This could mean coding a video game, creating a non-profit organization, designing a website, writing a book, bootstrapping a company – whatever.
Like the encyclopedia market. Josh Kopelman reminds us of the creative destruction process:
Today Microsoft announced that they will be closing Encarta — an apparent victim of Wikipedia.
The product that disrupted the encyclopedia market in the nineties (Microsoft Encarta), was disrupted itself by a rush to the bottom.
Will this happen again? Old media comes to mind …
Now that is a big, quick exit!
Founded in January 2006, nice exit in 4 years for founders and guess who … Sequoia Capital … that sold yet another portfolio company to Google.
Flight to quality continues, as VC firm Greylock Partners raises its 13th fund of $575 million in 4 weeks and attracts Reid Hoffman as investing partner:
Reid Hoffman, the founder and chairman of popular professional networking site LinkedIn, is joining venture firm Greylock Partners as an investing partner. The firm also announced today that it has raised a $575 million fund, its thirteenth.
US-based VC firms lobbying effort seems to bear some fruit: Venture Capital Firms Allowed to Live - WSJ.com.
Now the issue will be to distinguish “growth” private equity firms (that do not use leverage either and mostly invest through equity injection) and late stage venture capital …
