How VC Works – A Beginner's Guide
simplanations.substack.com
simplanations.substack.com
E.g. if the fund size is large enough, VC partners can do very well ($ millions a year) purely from the fee. So they are incentivised to close large funds, and for that they need to demonstrate potential, which is easiest to achieve through huge valuations on paper for their portfolio rather than actual exits.
Like, I'd love to see some relatively impartial analysis of stuff like that, because mostly the only people who talk about it are ranting.
When you take VC, you're given millions of dollars to build something huge, but it's also a Faustian bargain because you're limiting your range of outcomes.
You might grow a nice, profitable business, but if you can't 100x (or 1000x) their investment, your investors will be unhappy.
shameless self-plug: I just interviewed Sumukh Sridhara (AngelList Engineer, @vcstarterkit on Twitter) about VC from a programmers perspective on our podcast [1] and he's really, really good. If you're a dev looking to learn more about this, give it a listen.
[1]: https://podcast.newline.co/episodes/a-software-engineers-gui...
But what he won't tell you is much much harder to be a founder/engineer who actually does stuff.
It's not clear how different this is from say hedge fund? I would imagine it's the same set of people who just found a nice, easy alternative?
No idea how hard VCs work, but I suspect this isn't a fair comment. Sounds strikingly similar to engineers' opinions of salespeople - "their job isn't so hard, my job is much harder because I actually have to build something".
To me, dealing with people is a lot more difficult than dealing with machines. I think I would bomb spectacularly if my job was mostly wining, dining and cajoling investors.
once you do all that hard stuff, picking the investments is relatively easy, and mostly a numbers game, because any (large enough, ~60+) portfolio of not-unviable investments will perform reasonably, assuming you do, and keep doing, all the hard things noted above.
it's mostly tending to people and being proximate to both talent and wealth. only a small slice of the job is picking investments.
Although a hedge fund and a venture capital fund look superficially the same, they attract very different types of people because they specialize in different aspects of finance. I wrote a previous comment on this.[0]
Many folks who start hedge funds or join hedge funds come from traditional banking sectors like ex-Goldman Sachs, ex-Citi, ex-MorganStanley, etc. Their mental model is arbitrage and finding inefficiencies in financial markets.
In contrast, the type of people who start VC funds often come from the tech industry. E.g. ex-Intel, ex-Google, ex-Netscape etc. Their dominant perspective is growing new startups that beat the competition. E.g. The VC Marc Andreessen was not an ex-banker. He was the Netscape wunderkind programmer. Yes, sometimes some lower-level VC partners come from Wall Street (e.g. KPCB partner Mary Meeker was analyst at Morgan Stanley) but the prominent names in VC came from the technology sector. Likewise, the next generation of VCs will come from employees of today's tech unicorns.
The disposition and personality of a venture capitalist is closer to an angel investor rather than a hedge fund partner. The angel is just investing his own money to grow a hot new company whereas the VC is investing others' money.
Yes, I'm sure VCs "work hard" in the sense of putting in lots of hours or doing demanding work, but really, who cares about that. Lots of people, up and down the socio-economic spectrum work hard in this sense. It's not a helpful distinction. And I'm not impressed by hard work in this sense.
I have often wondered what it is, exactly, that VCs and executives and SVPs and bankers do that makes their services so valuable and so venerated. As I already mentioned, it's obviously not just because they are physically "working so hard." To me it's equally obvious that it's not because they are incredibly smart or wise. I assert with great confidence that (as a general rule) truly smart people are not wasting their time with work that is in any way associated with the movements of small green pieces of paper.
I believe that what is meant by "working hard" in the context of this set is a certain willingness to make deals or sales at all costs. By wisdom is meant intuition and connections or a rolodex (ie. the ability to get certain people on the phone).
But I know this for sure: something isn't hard if there aren't any real consequences for failing. And in the United States, if you are lucky enough to clear certain bars, you are exempt from failure. "Failure" and "hard" in this post means not closing a certain deal, but it doesn't mean anything like financial ruin. It means a minor roadbump, perhaps some professional embarrassment, and then onto the next money thing.
This is why I think these people are so utterly unworthy of the fawning adulation paid to them by SV folks desperately wanting to be rich, suckling at the teat, fantasizing about someday standing on that shiny stage with the little yellow ball mic, arms outstretched, telling everyone about their fantastic vision in broken sentences.
What you call "movement of small green pieces of paper", others might call "resource allocation", which is a pivotal function in civilization-building.
The fact that the acquisition of lots of money is an end in and of itself pursued by a class of skilled "elite" white collar workers (like VCs) is basically a side effect of the "resource allocation" you mention run amok coupled with faulty wiring in our monkey brains.
Acquisition of lots of money is also a proxy for impact — if you provide just $3 of value to every American, ONE TIME, congrats, you're a billionaire.
Hell, there are 7.8 billion people in the world. If you can get 1% of them to pay you a penny once a year, you're making $780k/year.
Most smart people spend a lot of time thinking about building empires. Making money is just a really nice side effect of building the empires.
In this world, there are 2 endeavors that make a LOT of money: empire building and macro resource allocation. The majority of the best and brightest will spend a lot of time thinking about those two endeavors no matter what the underlying system is. In a parallel universe where all resource allocation and production is driven by the government — your elite class will simply be in the officer ranks of those bureaucracies. It's no different from the military where the elite West Point graduates enjoy greater status than the enlisted rank-and-file.
I don't think you can look to the climate crises, and then conclude that there is a compete mis-allocation of resources, across ALL industries. That's plainly absurd. We don't have a mis-allocation of resources in the production of food, clothing, appliances, electronics.
Insofar as we have a mis-allocation of resources towards energy sources, it's because externalities are not included in the price of the thing. There is a pretty straightforward way to fix this that does not involve totally shifting the way we allocate all of our other resources...
Article is saying that VC is a challenging business
>they don't run the VC firm (hence the term 'limited').
It’s from the concept of limited legal liability more than who runs it.
Same for GP - generally just a legal shell. practically it doesn’t really do the stuff the article implies. The actual running of it is usually in a third entity (again to separate legal liability). And the carry sometimes goes to a fourth.
[1] https://www.amazon.com/Mastering-Private-Equity-Transformati...
I think the distinctions the author tries to use are generally wonky, but otherwise, I think you are trying to take the pedantic legal view of the entities. Semantics here are important.
> Same for GP - generally just a legal shell.
Legally sure. In fact you might find all sorts of legal structures about how GPs and LPs operate ("Fund I LLC", etc). Colloquially, however, GP means "the party who actually run the fund day to day" and LP means "party who puts money into a specific fund".
What does "expected to generate a 25-35% annualized return" mean here? Is that the mean/average annualized return of a VC fund? Or the "wished for" annualized return?
[1] https://www.theinformation.com/articles/andreessen-horowitz-...
For specific fund performance, I don't know of anything public. Most of the big names have had some funds with >20% returns, usually as they get bigger those get harder to maintain.
I don't know about you, but Venture Capital is not the first term I think of when I hear VC.