Angelsoft on Venture Capital
Angelsoft is a really clever idea – consolidate hundreds of sources of capital into a single website and allow startups to apply to them all with a single “pitch” and application.
Here they discuss something I’ve noted before – most VC funds do not do very well. They note that most had negative returns last year.
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I just want to clarify something about the Angelsoft post. It wasn’t saying that VC funds do not do very well.
The focus here was on how VC funds have to pick companies that have the possibility of making 20x the VC’s investment. Because of the high risk nature of investing in early stage companies, most of them fail. The few successful companies (i.e. google, youtube, etc) in a portfolio have to make up for the losers in the portfolio. These losers may be a 100% loss, or just a 2 or 3x return.
This isn’t a reflection of a VC’s overall performance, its a reflection of how difficult it is to predict the success of young companies. They usually have very little traction, and many aren’t even generating revenue. That early in the game you have a lot of people “betting the jockey” or deciding to invest in a person that they think will be successful entrepreneurs no matter what challenges the face.
Anyway, hope that clears some things up.
Cheers,
Hollywood’s preference for a ’sequel’ or ‘known formula’ is a well known financing safety factor for backers and I think it may well become a problem for venture capitalist firms. If someone pitches to group of VC firms each of the VC firms will want to put their money in the cream as defined by past track record or some other factor other than the innovation.
Evan thanks – do you know of any good stats on performance? I think so much VC activity is private or by insiders that it is hard to measure real performance. Angelsoft may be the first great source for that data.