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Losing Money

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Peter Thiel in Zero to One:

> The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.

> This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.

Is it a secret though? I thought it's 101 of startups-VC interactions, and I learned it by reading pg's essays in about the same time I first learned what a "startup" is. I.e. the whole thing works because some people with money do high-risk investments in which nine companies out of ten fail, but the tenth one pays them back more than they invested in all of them together.

But then you get the counter argument from people like Dave McClure who speak pretty actively against this style for most investors, implying they should be investing in way more companies at earlier stages (also I highly suggest avoid calling it a "shotgun" approach unless you want to piss him off).

There's a reason 500 Startups [edited out "he" and replaced with firm name - although he is also a prolific individual angel] tops the league tables for most active early stage investments every year, because they believe a lot of VCs are wrong.

Active investments by VCs since JAN2015 - http://imgur.com/QxVJVgZ

It's the same core belief: returns are driven by outliers. The difference is how to find them. Peter Thiel suggests focusing only on finding those with the potential to do it. Dave McClure suggests looking at tons of companies because you can't tell.

It's analogous to someone observing, "Over long time periods, companies that have low PE's outperform companies with high PEs" Warren Buffett picks individual companies with high PEs, while David Booth creates and index for all of them. Both have found ways to become billionaires.

What's his track record?

here's a rough summary of my track record (personal / professional)

1) my angel investments ($300K portfolio, 2004-2008 vintage): 3 exits (Mint, Mashery, SlideShare) @ $100M+ out of 13 -- roughly 3.5X cash on cash in ~8 years

2) my investments at Founders Fund (~$3M portfolio, 2008-2010): 3 unicorns (Credit Karma, Lyft/ZimRide, Twilio) + 3 large wins (Wildfire, SendGrid, Life360) out of ~40 investments via FF Angel + fbFund -- roughly $50-60M appreciation in value over 7-8 years, >100% Gross IRR

3) 500 Startups main funds: $30M Fund I / 265 companies / 19% Net IRR / 2010-11 vintage, $45M Fund II / 325 companies / 23% Net IRR / 2012-13 vintage -- so far, 2 unicorns (Twilio, Credit Karma), 2 half-unicorns (Ipsy, Udemy), 30+ "centaurs" (>$100M+ value). Fund III is $85M / vintage 2014-15 / 650+ companies -- still pretty early but so far Net IRR trending ~20%

our LPs have been happy with our results so far. my/our track record is likely upper quartile, and at least for my years at Founders Fund top decile. Peter and I may differ in approach & stage, but likely more in agreement than not about the #s, altho he would likely consider or strategy more brute force and inelegant than his. that said, I think made enough money for him at FF & found him 3 unicorns, so hopefully he doesn't think I'm an idiot ;)

Wow, great stuff, and thanks for answering this personally !

Good question - we don't have much IRR data on 500 Startups' funds (most of them are still open), but they never have trouble raising more money for new funds, so I assume their LPs are happy.

What does AUM mean?

(Yes, can I have access to pitchbook?)

Assets under management - basically how much cash these firms raise and then need to deploy through investments.

YC only 318!

> Is it a secret though?

It's a secret to the majority of the people that are the market for a book like that. As opposed to those of us who are on top of startups who found out that information many many years ago.

Well, he also uses secret throughout the book to mean "an idea that's not commonly accepted".

Do most VC's think this way and is this actually a "rule", meaning it's the way you succeed?

I'd think VC investing is like most other types of investing where you can take on different strategies depending on your goal. Some investors will take large risk in order for large reward, where other investors would rather take lower risk for a higher probability of some positive return.

Yeah I feel that tends to play out based on what class of VC you are. E.g.

seed/angels -> high risk / big portfolio (100s startups) / huge win-loss multiples (but invest small $)

traditional VCs/Seed A-C -> medium risk / moderate portfolio size (10s) / medium win-loss multiples (but invest medium $$)

growth private equity -> small risk / small portfolio (singles) / small win-loss multiples (but invest huge $$$)

Of course the divisions are arbitrary and some investors put money in all categories, but I feel like the above holds true in general.

I think the problem with taking the moderate-risk-for-moderate-reward strategy, as an early stage investor, is that a large number of your investments are going to fail anyway. And the returns of a company are not linearly correlated with its apparent risk at the early stage: a company might appear 2x as risky, but end up with 200x the returns if it succeeds. Early-stage investors that try to invest further down the risk/reward curve may find that the decreased risk doesn't end up making up for the decreased rewards, and so the fund as a whole becomes unprofitable.

Larry Page was fond of saying that it's actually easier to work on big problems than on little problems, because a.) there's less competition and b.) you can get people to help you. I'm not sure that's actually true anymore - now that everyone wants to be Google - but it's illustrative of the non-linearity of returns.

As an investor, I can say you nailed it with this explanation.

I think it's a "rule" as opposed to a strategy like "don't sacrifice your pieces in exchange for nothing" is a rule in chess. It's possible to succeed without following that guide line, but it's very difficult.

VC firms produce modest returns for a very high risk. You've probably only heard of one out every hundred companies that have been venture funded. Low risk investments just don't produce enough return.

> only invest in companies that have the potential to return the value of the entire fund

I have a feeling this is much, much easier said than done. How do you even determine "potential" of a startup, when, according to Paul Graham, "the best ideas look initially like bad ideas".

It's incredibly hard to identify successful companies early on. But following Thiel's rule isn't actually all that hard.

The key is to look at the total addressible market for a company or product. It has to be large, or growing quickly, or both. For example, AirBnB might have looked like a bad idea, but the hospitality market is huge, so if it did work out then they could grow to become a giant company. On the other hand, you could create a transformative product for blind people, and build a business around it that makes you a multi-millionaire. But VCs will never invest in your company because there just isn't a big enough market. You might 3x or 5x an investment but you'll never deliver the kinds of giant returns VCs need in order to make their LPs happy.

Of course, I'm talking about traditional VC firms - like the one the blog post's author runs. There are all kinds of investors out there with different motivations.

> But following Thiel's rule isn't actually all that hard.

> The key is to look at the total addressible market for a company or product. It has to be large, or growing quickly, or both. For example, AirBnB might have looked like a bad idea, but the hospitality market is huge, so if it did work out then they could grow to become a giant company.

Again, this just feels like post-hoc rationalization. The guy who wrote this blog post declined to invest in AirBnB despite Paul Graham himself practically begging him to. So maybe it actually is hard?

Just because he decided not to invest doesn't mean he didn't think AirBnB had the potential to become big. It doesn't mean he didn't think they were going after a big market.

He might have just thought the team wasn't very good, or the product wasn't quite right, or any of the other reasons investors pass on companies. The potential was there, but it just wasn't very likely given the details of the company.

I think what Thiel is getting at with his rule is to not bother with companies that don't have the potential to ever get huge, given their product and market. That rules out a huge number of businesses, so following it prevents you from wasting a lot of time.

> ... build a business around it that makes you a multi-millionaire. But VCs will never invest in your company because there just isn't a big enough market. You might 3x or 5x an investment but you'll never deliver the kinds of giant returns VCs need in order to make their LPs happy.

Ah, a lifestyle business. Just kidding -- I'm a fan.

I found PG's take on them in the footnote of Black Swan Farming (http://paulgraham.com/swan.html) refreshing:

> Nor do we push founders to try to become one of the big winners if they don't want to. We didn't "swing for the fences" in our own startup (Viaweb, which was acquired for $50 million), and it would feel pretty bogus to press founders to do something we didn't do. Our rule is that it's up to the founders. Some want to take over the world, and some just want that first few million. But we invest in so many companies that we don't have to sweat any one outcome. In fact, we don't have to sweat whether startups have exits at all. The biggest exits are the only ones that matter financially, and those are guaranteed in the sense that if a company becomes big enough, a market for its shares will inevitably arise. Since the remaining outcomes don't have a significant effect on returns, it's cool with us if the founders want to sell early for a small amount, or grow slowly and never sell (i.e. become a so-called lifestyle business), or even shut the company down. We're sometimes disappointed when a startup we had high hopes for doesn't do well, but this disappointment is mostly the ordinary variety that anyone feels when that happens.

When Facebook came around, wouldnt the addressable market have looked tiny? Basically US based college campuses.

Or was Zuckerberg already envisioning opening it up and spreading it far beyond college (and maybe high school) campuses?

Peter Thiel said recently in an interview[0] that when he made his initial $500K investment in Facebook at a $5M valuation in September 2004, he thought it would be big on college campuses, but didn't anticipate how successful it would actually become.

0: https://www.youtube.com/watch?v=ryFB6mvy4uE#t=3m18s

He has said himself that while working on Facebook in the early days, he thought the whole world needed something like it. I believe the college-first approach was more of a tactic, but also a somewhat obvious one after his earlier expeditions with "who's hotter?" or whatever. If he had launched "Facebook for the world" from the start, user reaction would see it just like MySpace and ask themselves why? Going with colleges first gave it a feel of exclusivity allowing it to grow the way it did.

Another thing about startups I've realized is you want to start with something small, but you could also see being expanded further.

For example, snapchat started with LA teenagers. Facebook started with harvard, then ivy league colleges, etc. Uber was licenced black car services in SF only at first, etc.

Always.

And it's funny - the startups that try to start with "we're revolutionizing the world" end up over-promising. The ones like you mentioned actually do. Not only just in starting in one market, but focusing on one customer segment, or one feature, or one vertical.

pg discusses some of these things in his essay "do things that don't scale" http://paulgraham.com/ds.html

This is really hard advice to take ..and in my limited experience also hard to convince investors of. But I think he's right ...and it amounts to getting in the game / get out of the building etc.

I don't know what the conversations around FB's early investment were like, or if expanding to a billion users was always part of the plan. My understanding is that very early on (i.e. the first six to nine months after it started) they wanted to be a kind of information hub for school campuses, with course listings and whatnot.

Even if that's true and they pitched investors on a kind of online campus hub for students, they woukd still have been going after a pretty big market - they could sell software/functionality to schools and/or they could sell advertising (reaching young people is quite valuable for brands since young people tend to have less fixed opinions and loyalties as consumers).

It may well be that investors thought it could grow to compete with MySpace. Others might have just thought being an essential part of every student's life would be a good enough outcome. (After all, there's plenty of VC in "ed tech" these days).

The hub for all college students is actually a pretty big addressable market. It's certainly not as big as Facebook ended up being, but it's still big enough to interest VCs.

Isn't Facebook's market their advertisers? Do regular users, nin-advertisers ever pay Facebook for anything?

Of course. After all, Fred Wilson refused to invest in airbnb even when Paul Graham begged him to.

YC (for example) works around this problem by investing in founders, judging for perseverance and hunger. Most other firms probably have similar strategies.

> "the best ideas look initially like bad ideas"

And they look even worse to those of us in the peanut gallery (and the pundits) who don't have access to all of the facts that someone who is actually investing has. They at least have answer to questions. A bit like investing at a higher level in the stock market (and taking major positions which often allows you to glean info from people that work at the company).

Which brings to another unspoken rule of investments in general - "Looking at the history, every good investment looks good and every bad investment looks bad". Everything is explainable that occurred in the past but not with the information that was available at that time.

> only invest in companies that have the potential to return the value of the entire fund

No it doesn't. If the investment is likely to break even it makes no difference, or can at least reduce losses. So long as there is a certain, critical number of potential high-earners, compared to total investment, you're ok.

Yup, VCs tend to favor go-big-or-go-home ventures. There are also lots of seemingly tiny things that can be made bigger too... and those are better pitches/founders to astute investers like Thiel whom realize small people are all talk and big people understate themselves.

Reminds me of running into some tipsy Sequoia guys the night before the WhatsApp announcement... no lie, I knew who they were and what happened (figure it was a gigadeal) the second they walked in to a certain donut shop. It's definitely party-worthy when the fund is above water and all other exits are IRR gravy.

isn't this a self fulfilling prophecy? if i only invest in all-or-nothing startups, doesn't that mean that my returns are going to look like i only invested in all-or-nothing startups?

It's almost impossible to have a different VC model though.

If you want to remove the variability in your outcomes, you have to do substantially more due diligence on each investment and decline a lot more. When your model depends on each investment doing okay instead of a few home runs, there's a lot more pressure on each investment to not fail. Eventually this forces you to only accept the least aggressive plans and you become a bank.

I raised a small seed round (200k) on my first company. At that time I felt like it was a staggering amount of money. The company didn't work and out we pretty much lost all of it. For the longest time, I felt really guilty about how I had lost my investors money.

I have a little more perspective now and realize that it was practically insignificant to my investor.

Ah well.

Honestly I think it is good to feel guilty. If you felt 0 guilt and just shrugged, I think it would make you seem a little bit of a irresponsible sociopath.

Now obviously don't live in a basement for 6 months because of your sadness, it was an investment that they could afford to lose ;) But I think it normal / expected to feel sad/guilty when you let someone down...

They gambled and lost. As long as you weren't funneling the money into your own account or fraudulently representing yourself you have absolutely nothing to feel guilty about.

I see where brianwawok is coming from. You shouldn't feel an overwhelming sense of guilt, but you also still let people down.

Also keep in mind that most entrepreneurs raise some very early money from individuals ("friends and family") who don't have portfolios with dozens of companies.

> but you also still let people down

This isn't true in my opinion. (Unless you didn't do what you said you'd do).

Quite. It seems rather misplaced guilt if anything; the investors presumably saw enough of an upside across all of their investments to make up for the majority that failed. Yourself and your employees, not so much.

What if your seed money came from your grandparents and family. Does putting a face you know to the source of the lost money change how you feel?

This is why you should think really, really hard about taking friends and family money. You might be able to handle the mental complexities of it, but I realized I couldn't.

It's sociopathic to not feel guilty that you accidentally made rich people slightly less rich?

Not because you made them slightly less rich, but because you did not help them make money when they trusted you with their money. But then i wouldn't call someone sociopath if they don't feel any guilt. After all we are not all wired the same way.

But if it was an accident, there is no need to feel guilty.

If you accidentally ran over a kid in the road would you feel guilt?

If it was truly and accident and you were watching the road and going the speed limit.. sure - don't become an alcoholic over it. But I sure would feel guilty!!!!

Now losing an investors money is a smaller offense to killing a kid, but it is still a "negative" event. Not sure accident or not matters, feeling guilt is natural. We need to acknowledge our feelings and move past them, not deny that they exist.

I think guilt is a first step to reflection. Feel guilty. Reflect how you can do better next time. Then move on and do better next time. I think you should do this in either case (accidentally ran over a kid, or failed a startup)

Its better not to feel bad about it. It allows you to fail faster and be more honest with investors and employees. The market pays for exploration. If you weren't a winner, you still did society the service of exploring that area.

It is indeed comforting.

We lost our investors 150k GBP, and I've been feeling guilty about that.

Investors invest what they can afford to lose.

Tough luck! I have never raised funds and planning to raise funds soon, but back of mind, i do have fear of losing the investors money. I think the founders should get over this guilt as long as they were lean and did everything they could to save the company. Btw, How did your investors respond when it didn't work out?

Things actually worked out okay. We had a sit down and amicably decided to wind things down. So I guess it hit me hard, but really was not a big deal to my investor.

> I have a little more perspective now and realize that it was practically insignificant to my investor.

Depends on the investor. There are probably thousands of VC's, and not all of them are comparable to union square ventures.

I think there's a similar founder guilt when founders go through an accelerator, but their company doesn't work out.

At 200K, you were most certainly raising from angels and not VCs, so the returns are different...

Look at it this way: Would you have felt better if you lost your own money?

Can someone help me do some math here? Take these sentences:

"It was all about five investments in which we made 115x, 82x, 68x, 30x, and 21x."

"In our 2004 fund, we invested a total of $50mm out of $120mm of total investment in our nine losers. "

OK so in the 2004 fund we have $70mm being invested in companies with rates of return between 21x and 115x. Let's be conservative and say the total return on that $70mm was 50x. That means 70mm --> 3.5B. If we assume that's the total return on the fund we get 120mm --> 3.5B.

I am now going to assume these returns were realized over a period of 10 years. So that works out to about 40% gains each year (compounded 10 times).

Is USV really making 40% every year for a decade? Are other VCs doing that well? I knew these funds were good investments but I didn't realize just how good.

No idea how reliable this is, but here's what Forbes has to say about USV's performance:

"66.96% IRR for its 2004 fund, a 38.88% IRR for its 2008 fund, a 29.04% IRR for its 2012 fund and a 61.44% IRR for its first opportunities fund" source: http://fortune.com/2014/01/24/union-square-ventures-raises-n...

He also says they invested in 21 companies in the 2004 batch. Which means that 7 other companies returned negligible results.

Average investment per company was about $5mm.

So we can end up with:

$5mm * 115 = $575mm $5mm * 82 = $410mm $5mm * 68 = $340mm $5mm * 30 = $150mm $5mm * 21 = $105mm Total: $1.58B, about $1.5B after losses.

So that comes out toabout a 27% return, using the same math as you, before costs and management fees.

The final results are public information via UTIMCO, so no backdoor calculations are necessary: https://www.scribd.com/doc/277150709/UTIMCO-PrivateMarkets

UTIMCO invested $22.25m and was returned $280m in cash with $33m still active in investments, resulting in a cash-on-cash return of 12.57x and a 66.7% IRR (after fees).

Overall fund size was $125m, so $1.57b cash-on-cash returns for the fund after fees, assuming no LP tiered returns

The best VC firms do make that in their best years. VC is a strange field in that the winners have outsize performance, while the rest fight to break even. Unlike Mutual Funds and most hedge funds, the performance of top VCs persist over time too. Remember that this is a field that disproportionately rewards the winners. (Look at Google's early investors making 1000x [0])

The 40% isn't what investors see. Take away 2% per year for expenses and 20% of the upside and you're down to 30% for investors.

[0]https://www.quora.com/How-many-shares-did-Andreas-von-Bechto...

Your 50x assumption is probably overly generous, but in general yes: the best VC funds do have great returns. But we're talking about less than a dozen firms with returns that good and they're all heavily oversubscribed.

The average VC has a much less attractive return profile. USV is not your average VC.

Well, investing in startups is a great investment... when you win, like this fund which apparently gave out great returns. But of course, those investors could have also lost all their money. Risk and potential return always go hand in hand when it comes to investing money.

On a related note, does anyone know why none of the big VC firms are publicly traded? Has that model been tried before?

The $70m is over 12 companies of which we know details of 5 of them.

They are not all that good. As he says himself, not even their other funds are as good as the 2004.

This can also be a good rule of thumb for entrepreneurs investing in ideas or potential new features, or even for ordinary employees managing their careers.

You can get surprisingly far in life simply by cutting your losses early. If you majored in art history, got to junior year, and then suddenly realized there are no jobs available - switch your major! Or transfer, if you have to. If you hate your job, find another one! If your skillset is out of date, learn whatever the new hotness is. If you picked a dead-end field that's being disrupted by a new industry, switch to the new industry.

Many people don't do this, because of a couple of cognitive biases: sunk cost fallacy and fear of the unknown. But they ignore that they've learned new information in whatever their old role was, and that the future is usually much longer than the past.

Plus https://en.wikipedia.org/wiki/Effort_justification

Not to mention the social pressure to never give up or quit anything. A lot of people would do well to quit and move on from something that just isn't working.

This also explains why VCs look to fund billion dollar opportunities even if they look a little risky. VCs are in the game for big exits and that's how the math works out.

Something to keep in mind when you're planning to raise money.

I think entrepreneurs often forget that VC's are deploying OPM, which puts an enormous amount of pressure on the firm to deliver outsized returns. I've met a few entrepreneurs over the years that fail to understand this fully - sad!

Other People's Money

Ah.

http://www.bmecapital.com/Common_Practices.html

It would be awesome to see a list of the winning companies and the approximate multiple on invested capital returned for each of them, along with which companies fizzled out.

Not expecting to ever see that, but it would be interesting to learn which ones they thought would be huge successes and what the eventuality was.

USV's 2004 fund invested in Twitter, Tumblr, Indeed, Etsy, and Zynga. Those likely represent the 5 double-digit return multiples Fred references. It was an astonishingly good fund — certainly among the best of its vintage and perhaps among the best of all time.

Indeed.com sold for around $1 billion, or so I heard from a startup founder that I did some consulting work for (he was in the recruitment space too, and had a prior exit or two). Later googled for that info and saw links that looked like it was true. A Japanese company recruiter.com bought it. Interestingly, I don't remember reading about the Indeed sale on Fred's blog, though I've been reading it for some years now. Could have missed the post, or could be he never wrote about it.

Edit: grammar.

http://avc.com/2012/09/indeed/

> Indeed has always been the quiet one. Nobody really talks about them. But as I have said a number of times on this blog, they are the most complete company in our portfolio. They have it all. Two world class entrepreneurs as founders. A solid management team all up and down the company. A product that is beloved and services more than 80mm people worldwide every month. An engineering team that has kept the service up with literally no down time that I can ever remember. A business model that, like Google's, is the best on the Internet. Revenues, profits, customer satisfaction, shareholder value. They built a fortress and I am just so happy to have had a front row seat watching them build it.

Also, just saw at the AVC link you posted, this:

http://avc.com/2012/09/indeed/#comment-662213687

Indeed used Lucene.

Ah, thanks, obligado.

Is there a technical meaning when he refers to fund years as "2008 vintage" vs. just "2008"?

Not beyond what you'd probably assume it to mean... http://www.investopedia.com/terms/v/vintage_year.asp

So, the idea: is "compare this fund against others that were started in economic conditions like 2008", not say 2006 or 2012. Does that seem right?

Yes exactly. Like cohort analysis for venture funds. Compare them to peers that had experienced the same macro trends and conditions.

The fund is labeled 2008 but they invested in opportunities over the course of several years.

>The fund is labeled 2008 but they invested in opportunities over the course of several years.

This is not the same term as label (vintage) with wines. A vintage of a wine is the same grape and the same year.

If the grape was similar, the wine could be labelled with the type.

If the grape and year are different... it seems more like a cocktail.

Order a new glass for each glass of wine from a new bottle (even if the same type/brand/field) I was told by a French colleague. I didn't notice at first, but then I did. Not quite a cocktail, but close.

If the fund is mislabeling itself, it is common, ask questions about why so, and if you have a 5 year exit plan while the fund has as 2008+x year exit date.

You're entering a 2008 plan, marketed to investors as a 2008 plan. When 2008 +x yeas happens, which seems soon, are you just shoring it up with your idea that they will take away?

Yes, it's not the same as with wines, though many cheaper wines are more like "cocktails" in your example.

The fund is not mislabeling itself. Words can mean different things in different contexts!

http://www.investopedia.com/terms/v/vintage_year.asp

I suspect it's more of a pompous thing. Thinking of the funds like wines: they mature/get better with age.

It's not really pompous. Fund 'vintage' is the way that VC firm partners (GP's) have to orient their thinking because it's how their investors (LP's) measure the success of a particular investment in their firm. The term vintage has been standard fare in this world for a long time, even if it draws its roots elsewhere... See also: 'carried interest'[0], which draws its origin from shipping centuries ago.

[0] https://en.wikipedia.org/wiki/Carried_interest

It's risk/reward. Whether a VC fund, NYSE, or government security, you can risk more for greater reward. This does not mean, as the article implies, that you should. It depends on the individual and the purpose of the investment. I can probably make a lot more money investing in a riskier company, but I am also more likely to lose some or all of my investment.

If I am considering investment in a fund that expects a 40% annual return, I should remind myself that if it was a sure bet, then enough people would be investing in it to drive the price up and the return down. There are plenty of investors as smart as me, and many of them are willing to do more research than I am.

The Babe Ruth Effect in Venture Capital

http://cdixon.org/2015/06/07/the-babe-ruth-effect-in-venture...

I'll summarize: Many startups fail. Don’t throw good money after bad.

Why does he use mm ($25mm)?

Tl;dr - It's historical usage to disambiguate in finance.

http://english.stackexchange.com/a/182072

In my experience when you see "MM" they have some kind of finance background, probably some time in banking. They could be aping someone else of course.

It's just an old-school convention. I always write it like that myself, and it looks weird to me when there is only a single lower-case "m".

heh, I guess I just never have needed to write about millions of dollars on official documents.

'M' is the roman numeral for thousand, so 25m traditionally means 25000. mm is thousand thousand, aka million.

And SI uses 'M' as a prefix for one million. Oxford defines 'm' as million(s) in a money context, Merriam-Webster includes 'M' as an abbreviation of million.

It seems odd that anyone would think $25m should be read as $25000. It's much more likely that I would read $25mm as 25 millimeters instead.

The problem is that there are multiple traditional usages, with overlapping meanings.

Capital M has traditionally stood for both thousand and million. In other words $20M and $20m is ambiguous, depending on what tradition you come from. $20MM and $20MM and $20k are not ambiguous.

That notation doesn't really make much sense though, since MM is roman for two thousand.

Yeah and also literally no-one says "25M" when they mean 25000.

I believe the traditional usage requires capital M:

   $20M = $20,000

   $6MM = $6,000,000

Of course, it's more common now to use lowercase k:

   $30k = $30,000

25MD (Megadollars) would be nice. Similarly, why don't we ever talk about Megameters?

A, uh, personal eccentricity of mine is to treat dollars like any other unit written after the amount and optionally taking SI prefixes (At least in any writing I can get away with it). It's doubly nice because it plays well with rates/other composite units.

So:

$1,000 -> 1 k$

$1 million -> 1 M$

$1 billion -> 1 G$

$100,000 per year -> 100 k$/yr

I'm sure it'll never catch on broadly, but it's conceptually pleasing to me.

Just as long as you don't write it "$1,000 dollars".

I mean, is that 1,000 $^2?

Technically, k, M, G, and the rest are SI prefixes created to be used within SI system of units. Those may be useful as finance prefixes too but it just happens that there already is another set in use.

> Similarly, why don't we ever talk about Megameters?

I think we do - I went on a 10 megametre trip when I went to Japan by land and sea. It's just very rarely a convenient unit because not many things are that long.

I find myself describing distances as thousands of kilometers fairly often.

But even then, I'll admit thousands of km is easier to immediately picture than Mm. "Change your oil every 15Mm" would look odd in an owner's manual.

> I am a big believer in “loving your losers” in the sense that you should not orphan them and you should work hard to get to the right outcome.

From the guy who talked about cutting off losers early a paragraph ago.

My 'fantasy VC' scorecard since 2008 is nearly perfect, having hypothetically put money into snapchat, air BNB, Uber, and Facebook. Picking the future winners from the losers seems very easy, but the problem is if everyone did this strategy many companies would go unfunded. Just simply funding companies that are already big and growing rapidly and riding the momentum, seems to guarantee the most consistent returns. Investing in tiny startups seems not worth it since the expected value is not high enough and the liquidity is probably poor.

> Just simply funding companies that are already big and growing rapidly and riding the momentum, seems to guarantee the most consistent returns

if you ever try raising money, you'll find this is pretty much what 99% of money people do. and they'll say it to your face, because what are you going to do about it? beg harder?

it's a bullshit job, to be honest. anyone with decent intelligence and basic social skills could do it. that's why they guard the industry tooth and nail.

i'm no yc fanboy but in my opinion that's what makes them "the 1%", they actually invest in risky startups, en masse. i try to picture some of the vc/pe firms i've talked to doing this, and it doesn't even compute.

Unfunded by VCs- Not unfunded per se. You can always bootstrap or get Angel-funded. If you are making a dentist office software, find a rich dentist- not a VC.

I bet you only watch the best SNL skits, too.

Nice write-up, would have loved to know how your current fund performs and who are the losers now.

Unless you are currently one of those "loser" companies...

Note: Ben Graham wrote about all these decades ago. (It doesn't make this article less true, etc. -- just if you're interested in these basic rules of investing, then read 'The Intelligent Investor'.)

I thought Ben Graham, and the Intelligent Investor, was the absolute antithesis of high risk Venture Capital.

From the introduction to that book:

"Our text is directed to investors as distinguished from speculators, and our first task will be to clarify and emphasize this now all but forgotten distinction. We may say at the outset that this is not a “how to make a million” book. "

and

" “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”"

Fred Wilson is in a very, very different space then Ban Graham was discussing in the Intelligent Investor.

They are both speculators, just different time horizon.

My epiphany came when a few years ago I had a conversation with a friend who is a brewmeister and restaurant manager for properties owned by his family's trust. (If you live on the Peninsula, you have probably had his beer.) His grandfather had set up a trust in order to pass his Monterey-area produce farm to his children, and the trust and farm are still going, and growing. My friend mentioned he was spending the weekend at a family retreat with some of his siblings and cousins that were the current trust management. The topic for the retreat was identifying which of "the cousins" (the pre-teen and teenage children of the next generation) were likely to be future manager-trustees, and which were likely to be passive trustees. The goal being to start identifying and grooming the next generation of management.

So my definition of investor: If you are managing the asset with the intention that someday your as-yet unborn grandchildren will be taking over and managing the asset, you are an investor. All else is speculation, just on various time horizons. An investor is never looking for liquidity, ever -- only speculators expect to turn an asset into cash in the foreseeable future.

How do you define liquidity? If there is no way to take your investment, and turn it into liquid cash in the form of a stock sale, or dividend, then what is the purpose of said entity? Sounds more like a foundation with some broader goal (societal, religious, environment, etc...) than a financial investment to me.

Ahhh... we have discovered a True Speculator :)

If sale of the asset is the only way your asset returns cash to you, then it is certainly speculation by my above definition. Have you not considered operating a business as an on-going entity producing profits on a regular basis? Or have you become so blinded by the VC model that you can't imagine doing anything other than selling your stock to the greater fool? I can assure you that my friend's brewery produces liquidity in the form of cash as well as libations. Well, the latter turns into the former, to be most precise.

It is striking that actual operating profits have become such an insignificant part of the asset valuation process that some people forget the existence thereof.

What purpose are profits if you don't liquidate them? Unless you are Scrooge McDuck and you just enjoy diving into vaults of moola. (not sure if I'm dating myself with that reference)

Good thing he's got bitcoin to fall back on when the vc bubble pops

Why would anyone feel guilty about losing money from a VC?

In the end, it's a venture capital FUND: risk and return are inherent to this. It's not the VC's money, but a collection of GPs (themselves have thousands of individual investors).

Your loss is already accounted for in their portfolio. Otherwise, they're not doing it right.

Have you ever taken money from outside investors? It doesn't really matter whether the investor expects loss or at least is aware of the risk. Losing other people's money when they took a bet on you is a miserable feeling. Add it on to the list of things that can keep you awake at night when you're a founder or startup exec.

No I haven't, but I have money on companies.

Many things can happen (disease, conflict, competition,etc) and I surely won't make a founder feel terrible about himself because of that.

Instead, I pick someone with a different personality, industry and network that is able to balance my risk.

I applaud that you would never try to make a founder feel terrible intentionally. That said, most founders end up struggling with those feelings regardless. It's an awful feeling, even if you know your investors understand that there is huge risk and don't demand a guaranteed home run (not that there is such a thing).

See my other comment. I think you SHOULD feel guilty. You should also get over it and move on with your life, but if you literally feel NOTHING for losing someone elses hard earned money, something might be wrong with you.

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