The Quickest Way to Understand VC
blog.yesgraph.com
blog.yesgraph.com
With the exception of a handful of partners at a handful of firms (nothing but respect for a16z here), they are all complete dunces, and they don't have the slightest clue what they are doing. This article is right that they are going for the biggest possible outcomes, but it misses out on the largest and most exploitable quirk of the VC industry: that they're all chickenshit. They wont invest unless someone else does, thereby validating their decision to invest.
The most effective cold pitch I've ever seen at our fund involved what was to me a completely obvious lie about outside interest. I met the guy after I left and he basically confirmed that he pulled the same stunt at all three of the firms that invested. He worked them in rotation, building actual interest off of what was initially fake interest. And it worked like a charm.
You've probably got to be quite bright academically to get in but if you look at how their compensation works they mostly get a cushy job with a high salary paid for by a 2%/year or so charge on funds invested. Performance fees on exit are years away. So if they can say to investors "we're in all the hot starups like color.com" it works if the investors throw in billions even if the startups are disasters. So they may be dunces at understanding startups but are probably quite good at their core business of fund raising.
No, you just don't understand VCs.
VC is not for everyone btw -- profitable business are amazing.
Huh. Sounds like an inefficiency on the funding side. Or is it that these biz's profitability typically enable self-funding? Why does a profitable startup that doesn't have VC-style growth potential need funding?
It is a vicious cycle - once a market attracts the attention of VCs, it becomes really hard not to join in.
a) strict management/information rules - so burdensome that it is available only for big companies - i.e. corporations
b) startups with scaling - that is high growth business - where growing is the only option for the manager
c) having a partner with money who takes part in the management
And my personal experience of investing.
Yep. My scenario was told from the POV of an individual company. That's not a good way to explain the behavior of investors deciding between companies.
Film is sometimes slightly different, in that two or more studios can co-finance a film and share in distribution profits (though this occurs through convoluted means, and for all intents and purposes, there is usually a clear winner among the herd).
Ultimately, however, the same power law usually applies. One hit is often said to cover the cost of 10 or more failures, and then some. (Of course, the converse is sometimes true: one massive failure can tank a studio's year, and occasionally even a studio.)
I'll tell you this much: Disney doesn't give half a shit about any and all box office failures in fiscal 2015 when "The Force Awakens" made $920M+ at the domestic box office, to say nothing of its billion+ more overseas and untold billions in merch. And on any given year, if it had the choice, it would much rather have one hypothetical "Force Awakens" and a handful of flops than, say, a better average return per movie without an outsized monster hit.
The highest levels of the movie business, like the highest levels of most corporate America these days, are virtually indistinguishable from the finance industry.
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It's not just a matter of "swinging for the fences makes me feel more fulfilled." It is "I have promised Yale that I will swing for the fences or I'll receive a call from their attorney asking politely for their $20 million back, and that call will be polite exactly once."