From 25iq:
1. “Venture Capital is a hits business. All of the returns come from the top cohort of investments.” “The distributions of exits each year is distributed on a power law curve.” Venture capitalists working with partners select a portfolio of bets which have significant positive optionality. Over the lifetime of the fund the venture capitalists discover a very small number of blockbuster 10-2,000X hits from the portfolio. After tape measure home runs emerge, it will seem obvious to many people who are not top tier venture capitalists that the startups were destined to be a success. Survivor bias will cause most people who are not involved in the industry to forget that 50% of the bets returned no capital. Venture capitalists will have little survivor bias about this fact as they watch real companies employing real people that they like and care about fail. An experienced venture capitalist knows that “the whole” of what emerges from the startup creation process is not predictable by looking at the sum of the parts. In fact, it is mostly the connections between the parts of the system that mostly drives change, often in nonlinear ways.Mr. Wilson's business blog is AVC.
The result of this process are multiple power laws, as I have written before. Why are there power laws in venture capital? You can read the papers on this point and they inevitably indicate in very academic language (plus lots of formulas) that one or more factors are feeding back on themselves. What exactly is feeding back on itself is rarely something on which there is a consensus among the academics. Even if there is consensus, it is likely that there are factors driving change which have not revealed themselves.
In the case of venture capital, my thesis is that networks (defined in the broadest possible sense) with better quality provide access to superior feedback in the form of talent, suppliers, customers, distribution partners and capital. That superior feedback drives things like better product and service offerings, better distribution, and customer awareness. The better a venture capitalist or startup’s network gets, the even better that network gets [repeat in the form of a Matthew effect].
2. “Ideas that most people derided as ridiculous have produced the best outcomes. Don’t do the obvious thing.” As Will Rogers put even more simply: “Always drink upstream from the herd.” Trying to find positive optionality in areas where others are intensely focused is what investors call a crowded trade (i.e., too many people trying to do the same thing). You can’t do better than a mob if you are part of the mob.
People who follow the crowd and expect success remind me of this old joke. “Late one night, a police officer found a drunk man crawling around on his hands and knees under a streetlight. The drunk told the police officer that he was looking for his keys. When the police officer asked if he was sure this is where he dropped his keys, the drunk man replied that he believed he dropped them across the street. “Then why are you looking over here?” the officer asked. Because the light’s better here, explained the drunk man.” A venture capitalist who follows the crowd is like the drunk looking for his keys under the streetlight,when his keys are across the street.
3. “Getting product right means finding product market fit. It does not mean launching the product. It means getting to the point where the market accepts your product and wants more of it.” “The first step you need to climb is building a product, getting it into the market, and finding product market fit. I think that’s what seed financing should be used for. The second step you need to climb is to hire a small team that can help you operate and grow the business you have now birthed by virtue of finding product market fit. That is what Series A money is for. The third step you need to climb is to scale that team and ramp revenues and take the market. That is what Series B money is for. The fourth step you need to climb is to get to profitability so that your cash flow after all expenses can sustain and grow the business. That is what Series C is for. The fifth step is generating liquidity for you, your team, and your investors. That is what the IPO or the Secondary is for.” There is a rhythm to raising capital which is essential to understand. No two funding processes are exactly the same, but they tend to follow a roughly similar beat. In other words, there are milestones and heuristics which investors and companies tend to use. To paraphrase Mark Twain: startup financing success never repeats itself exactly, but the Kaleidoscopic combinations that constitute the present often seem to be constructed out of the broken fragments of previous attempts. At the two bookends: getting a valuation that is too high can turn into a painful down round or worse, and selling too cheap can mean painful dilution. Like Goldilocks, the entrepreneur must find something that is “just right” when it comes to financing the business....MUCH MORE
He also has a personal blog Fred Wilson Dot VC.
