Two of very interesting posts about VC fund economics are over at Fred Wilson’s joint:
First “Venture Fund Economics” | Second
A challenge is that my understanding is that Union Square fund has done *much better than average* and therefore you would not want to make generalization about the VC industry from their experiences. I also need to get some feedback from Fred regarding the time frames he is discussing in the specific example he gives of a fund’s projected performance.
As I noted about some of his Venture Capital observations some time ago it’s very important to make sure you are factoring time into these equations, especially when the time frames are in decades or many years.
Fred points this out in the first post as well, noting that doubling your money is not really that impressive if it happens over a ten year time horizon. It is critical to always recognize how the current value of money is greater than the future value – the gist of the notion of how “discounting” affects investment and other economic decisions.
Fred Wilson’s a sharp guy and his Yahoo plan is basically to outsource search to Google and dismantle the place into Yahoo’s many valuable components like the stake in Alibaba. I’m intrigued by this creative proposal though I can’t see Yahoo doing many of these things.
Probably the big unknown in the big Microsoft+Yahoo equation is whether Yahoo will be willing to concede the search battle and use Google search and Google monetization. In the short term this would bring more profit to Yahoo, but long term effects are not clear since they’d be effectively a prisoner to Google who would control a key function of Yahoo’s business. However Yang and the Yahoo board would likely see this as a superior situation to ownership by Microsoft. Google’s stock has been dropping severely but they could still sweeten the pot with other helps, so I’ll be watching for better offers from Microsoft and counters from Google in the coming weeks.
disclosure: long on Yahoo
Fred Wilson’s got a fascinating post about his history of investments over at Union Square Ventures. Of course he’s got every reason to post his results, which appear to be exceptional although he has left out a key factor in his little analysis, which is time. I note over there:
Fred, these are impressive results and to my understanding much better than average VC returns, which are negative, right? Don Dodge posted min-analysis some time ago where he wound up concluding there was a lot more VC failure than is normally thought.
There are elite guys like you and Jeff Clavier who “beat the averages”, but isn’t “making money” with startups an unrealistic expectation, since those VCs and companies that succeed are still around to talk, but those who fail are not blogging about the burgers they now flip to pay the bills?
I’m also noting that without “time” as a factor the return is not meaningful. 3x is easy….if you use a 15 year horizon!
At a very modest annual return of 7.33% one would expect to triple an investment in 15 years. A 10% return will leave you with 4.5x your initial investment in that same time frame. More dramatically, if time is not a factor then I’m happy to guarantee you a return of, say, a million percent. It’ll just take a while.
This isn’t to suggest Fred isn’t a great investor because I think he is the exception to the normal rule in Venture Capital, which are low returns. After I wrote about Don Dodge’s suggestion that average VC returns appear to be negative Jeff Clavier also suggested in a blog comment here that only the top 25% of VC firms are averaging positive returns, and this really shook up my understanding of things.
Venture Capitalist Fred Wilson is always up to something interesting, and his current Facebook test is no exception to that rule. He’s making a modest buy on a 1000 ads / $10 per day mostly just to see how the new Facebook targeting works for his Union Square Partners advertising.
Unfortunately a VC firm is not likely to get much “business” from Facebook, so maybe I should fork over the pizza per day price for a test on something like motel bookings or air travel?
However I’m pretty confident the money would be wasted. As I’ve suggested before Social Network advertising, targeted or not, is nothing like Google SERPS advertising and it’s become hard enough to leverage that to any advantage in the travel space.
What a GREAT blog post from Fred Wilson as he flew to Portland! He rapid fires 30 things including his thoughts on the bubble 2.0 (maybe about to pop, maybe not), and most importantly offers up this billion dollar company idea:
15) Why hasn’t anyone been able to aggregate all of my comment activity across the entire web and turn it into a feed that I can put into my lifestream on Tumblr? There are a bunch of companies working on it, but I don’t think anyone has nailed it yet. And I am not just talking about blog comments, I am talking about ratings and reviews on Amazon, Yelp, Menupages, Digg, etc, etc.
Fred, I don’t get this either because the technology is definitely in place and although I think this would take a pretty substantial server infrastructure – to cache and search a lot of content regularly – it seems like the payoff would be the best social networking environment out there.
I’m saving up my money so, someday, I can be a cool VC guy like Fred and ride coach class even though I don’t *have* to ride in coach. Kudos to him for that. Frankly, I have a feeling the people back there are more interesting anyway.