Disqus - Latest Comments for infoarbitrage

Re: Recycling: The challenge and the opportunity for a Seed stage VC

infoarbitrage — Thu, 06 Oct 2016 07:28:38 -0000

Thanks, Jay. Given your strategy, recycling is a perfect way for your LPs to get additional leverage on their investment dollars. Good luck with it!

Re: Recycling: The challenge and the opportunity for a Seed stage VC

infoarbitrage — Wed, 05 Oct 2016 20:20:41 -0000

Hey Jim, thanks for the thorough and thoughtful response. I agree that it is a very context-specific issue. You have provided some "edge" cases that prove the point that a fixed rule almost never works. But as a policy when there is tight alignment between the GP and LPs, e.g., where carry distributions aren't taken until paid-in capital has been returned, where the GP has invested significant dollars in the LP, and where LPs are long-term, cash-on-cash return investors and not IRR-driven investors, maximum recycling into promising portfolio companies (versus bailouts) with 5-10x upside always makes sense. While DPI is clearly the North Star, when parties are playing a long game, value maximization, e.g., maximizing cash-on-cash, is what recycling can provide.

Thanks again for the great comment.

Re: The Blurring Of The Public And Private Markets

infoarbitrage — Mon, 16 Nov 2015 07:38:41 -0000

Fred, I think it's likely that VC "best practice" will migrate towards an OPM method of valuation as opposed to marking positions to the last round price. This will be especially impactful on later-stage financings with complex preference stacks and kinked payout curves, as Series A, B and even C investors' interests begin to diverge from those of Series D and E investors. Regardless, I believe this is a healthy evolution towards a more honest, risk-adjusted methodology than simply saying "Hey, I own x% of Company Y that just raised at a $2BN post and therefore my position is worth $z." It's only worth z if values continue to increase unabated. As we all know this is seldom the case over 10-15 year cycles.

Re: Crowdfunding for start-ups: A durable trend or a bull market phenomenon?

infoarbitrage — Mon, 24 Nov 2014 13:56:56 -0000

This is a fantastic analysis. Thanks for sharing.

Re: Crowdfunding for start-ups: A durable trend or a bull market phenomenon?

infoarbitrage — Mon, 24 Nov 2014 10:22:42 -0000

In theory, you are undoubtedly right, but it is not clear that what you want is either best in the long-run or palatable to multi-partner GPs. Let's break a firm down into its elements: (1) partners with different preferences and skill sets that move in and out of favor; and (2) fungible capital that can be allocated according to what investments are most attractive at a given point in time.

In theory you could seed individual partners to run "hot-of-the-moment" funds when you believe their expertise lines up with the current market opportunity. However, this model contains many risks such as: (a) how rapidly trends change and the market opportunity wanes; (b) lack of cross-fertilization provided by smart managers whose sectors are not currently in favor; and (c) the manager getting discouraged by being pigeonholed into a particular discipline which waxes and then wanes, inhibiting the creation of a durable business.

These risks are traditionally mitigated by investing in firms, not individuals, who generate attractive returns over time by having a partner base with a diverse and complementary set of skills and experiences. While in certain funds particular partners will generate the lion's share of returns, in others performance will rotate to those whose strengths align with the current market opportunity. So the "netting risk" is shared across the firm, rather than by the individual GPs (and LPs for that matter). Returns may be dampened but the environment for generating those returns are much more likely to be sustained than in an array of single-manager specialists (who are burdened with several risks associated with being an independent practitioner as mentioned above).

It is hard to see how you can create a "best of" portfolio at the manager level as opposed to the firm level, which is precisely what the Opportunity Fund concept is designed to address. I ran a "best of" platform (DB Global Masters) as well as a single manager platform (QVT, GSA, Altima, Gandhara, Equitech, etc.) at DB Advisors. And it worked because we were trading the liquid markets; there were no portfolio effects within a single strategy as opposed to venture, given its 12+ year time frame. But trying to hive off a single manager from a partnership (by allocating capital to them and away from other partners) while still being part of the partnership goes against the very notion of what partnership means. Sometimes theory doesn't work in practice, regardless of how compelling the concept may be.

Just my $.02.

Re: Crowdfunding for start-ups: A durable trend or a bull market phenomenon?

infoarbitrage — Mon, 24 Nov 2014 07:45:09 -0000

Personally, I don't think so. Being a successful angel investor is not the same as being a successful venture investor, especially as check sizes go up. Why? Money management. This is the hardest part of early-stage investing: institutional investors demand this and most angel investors have little to no skill with it.

What exactly is money management? It has to do bet sizing, follow-on decisions and deal structuring. Each of these variables change as circumstances change and they also interact with each other. There has been more money made - and lost - in the follow on decision, and it is easy to get it wrong. And at larger check sizes, the cost of being wrong can damage the return profile for an entire fund. I've been doing venture now for five years (after having been an angel for five years with a much less keen appreciation for and experience with venture money management principles, except for the fact that I spent nearly 20 years on Wall Street doing this on the liquid end of the markets) and still feel deeply challenged by area.

To be clear, you asked whether Syndicates would be made up of LPs like ours in the future and I said no, which is correct. However, LPs who routinely invest in Micro VCs who are heavily focused on writing that first check without expectation of significant follow-ons are a different story. Their profile is much more akin to an institution putting money directly into angel deals, which makes them much more suited to participate in Syndicates.

Re: The Role That Mothers Play in Shaping our Families

infoarbitrage — Sun, 11 May 2014 12:32:30 -0000

Beautiful words, Mark. And 100% true. I feel blessed in exactly the same way. Thanks for penning this.

Re: Venture Capital and “Innovation”

infoarbitrage — Tue, 17 Dec 2013 08:50:38 -0000

What you refer to as "long term" is what I'm referring to above. Your hierarchy maps quite well to my own thinking, so I'm not clear about what you mean by "public finance obligation." Are long-lived battery technologies "strategically interesting?" I'd say so. Is the VC community well-positioned to accept the losses along the time scale necessary to secure step-change breakthroughs? No. This is where I see DARPA and other agencies picking up the slack, or perhaps GE and other massive firms with R&D budgets in the tens of billions and time scales measured in decades.

Re: Venture Capital and “Innovation”

infoarbitrage — Mon, 16 Dec 2013 11:04:45 -0000

Mark, interesting comment about pension funds. Certainly Ontario and a handful of others have invested in the infrastructure to do direct investing, but most are ill-equipped to assess such risks. I worry that "dabblers" will fall victim to adverse selection, get smoked and pull away. If they built the right team, however, I could see them as being a viable long-term financing source.

Re: VC funding vs. Crowdfunding - let’s get real

infoarbitrage — Wed, 03 Apr 2013 18:04:04 -0000

I think in the scenario you painted you are right. My only comment is on the likelihood of that scenario playing out. Look, plenty of people build awesome bootstrapped companies and then are begged by growth equity firms to take their money, so it is certainly possible that a founder could take in crowdsourced capital and build a great business that is sought after by VCs. I'm merely saying in my experience that this (with the "this" being a first-time founder taking angel or crowdsourced money) is a very unusual occurrence as it requires a level of maturity, instincts and knowledge that most first-time founders lack.

Re: VC funding vs. Crowdfunding - let’s get real

infoarbitrage — Wed, 03 Apr 2013 17:44:21 -0000

Makes sense.

Re: VC funding vs. Crowdfunding - let’s get real

infoarbitrage — Wed, 03 Apr 2013 17:43:36 -0000

I agree.

Re: VC funding vs. Crowdfunding - let’s get real

infoarbitrage — Wed, 03 Apr 2013 17:43:17 -0000

I would rather take crowdfunding than take money from a bad partner, every day of the week. Risks are high, but working with someone whom you don't like, trust or respect introduces even higher risks. As from my perspective, people is the most important decision criterion.

Re: You Can't Just Hack Your Way to Social Change

infoarbitrage — Fri, 15 Mar 2013 10:04:19 -0000

Jake, this is fantastic. The article is a service to everyone who is deeply committed to data science and, more importantly, problem solving. Thanks for de-bunking the mythology of the data scientist and highlighting them for what they are - talented practitioners, not miracle workers.

Re: Information Arbitrage - Knowing when it's time to go

infoarbitrage — Mon, 03 Dec 2012 14:31:10 -0000

Great thoughts. I will definitely share my perspective as you've suggested.

Re: Information Arbitrage - Knowing when it's time to go

infoarbitrage — Mon, 03 Dec 2012 14:29:17 -0000

Jim, totally valid point. I simply can't speak to those people because I'm not that way and can't even put myself into that mind-set. Work has always been an essential part of my identity, and I've always sought to optimize in the context of bettering my life, not simply more rapidly achieving a means to an end.

Re: The great unbundling

infoarbitrage — Sun, 25 Nov 2012 09:25:01 -0000

No doubt, Hunter. Disintermediation is a trend that simply cannot be stopped. And this is good for customers everywhere.

Re: The great unbundling

infoarbitrage — Sun, 25 Nov 2012 09:23:58 -0000

Paul, I believe the data should do the talking. I was merely putting forth a hypothesis. And in essence what I am saying is that clearly money appears to be the objective function, and that structure will eventually morph into that which maximizes money. Whether today's conferences = TV networks is the right atomic unit I don't know (but the Big 10 Network certainly makes a shit-ton of money), but I am confident that the lanscape will look far more fragmented and pieced together a la carte (and driven by the teams themselves) than it is today.

Re: Too Many Seed Investment Choices

infoarbitrage — Wed, 09 May 2012 08:28:35 -0000

Brad, this is an absolutely brilliant post. Simple, straight-forward, intelligent and honest.

We at IA Ventures have never wavered from our philosophy, but our approach to portfolio construction is something we grapple with every day. Balancing bandwidth with support, exposure and ownership, back-of-a-napkin and full-on Series A. You have laid it out in plain english for all to see. After much discussion and debate among our partnership, we've fundamentally arrived at a similar point. I'm not surprised that you, Seth, Ryan and Jason had already figured it out long before, but it is validating that our process has guided us towards a common approach.

You have been a great mentor and friend to me, and your writings (both blogs and books) deliver this to the masses. Keep it up!

Roger

Re: Board member vs. mentor dynamics

infoarbitrage — Tue, 08 May 2012 18:02:09 -0000

Kirby, I share your view if not your optimism. I've seen far too many dysfunctional VC/founder relationships where the "maturity" and "transparency" parts are missing. Also, sometimes the input needed from a mentor doesn't necessarily relate to intra-company dynamics but simply to act as a safe sounding board. Regardless, the picture you've painted is certainly the one I'd like to see.

Re: Board member vs. mentor dynamics

infoarbitrage — Tue, 08 May 2012 18:00:01 -0000

Sean, I think you have a very valid perspective. Thanks for sharing.

Re: Coming Of Age

infoarbitrage — Sat, 31 Mar 2012 23:48:20 -0000

Fred, this is a very important post, and something which you know I think about all the time. There is no formula for being successful in the venture business. But I do think there are some common characteristics that are shared among those who have demonstrated success through cash-on-cash returns and reputation among key constituencies - entrepreneurs, strategic partners and acquirers, peers in the venture business and Limited Partners.

The best investors I know are amazing listeners. They are less interested in demonstrating their intelligence and more concerned with deeply understanding an entrepreneur's idea and engaging in a meaningful dialogue which, regardless of investment decision, generates real value for both parties. They also generally cultivate great mentor relationships. While they are invariably mentors themselves, they continue to work on upping their game, even when it appears to outsiders that there is little that they can learn given their success. Great VCs also tend to have a genuine humility that respects the complexities of the business and the fact that while experience and historical success are great, there is no assurance that they will continue to adapt and remain current, relevant and value-added as paradigms shift and markets rapidly evolve. Finally, truly successful investors have a fundamental respect for founders, regardless of whether or not they like their idea. It is a basic appreciation for the passion expressed by those pursuing an idea that drives them to start a company. It is a holy mission. The mere effort deserves respect if done with thought, honesty and if it emerges from deep within.

These characteristics, I believe, are more frequently found in somewhat older investors simply because they have more data and more failures. Failures force introspection and perspective that is hard to acquire in any other manner, and EVERY experience venture investor has taken their lumps. It is a price every investor pays at one time or another. It is also the case that more experience generally breeds awareness that the investor doesn't know everything, and that cultivating a web of mentors is an essential element to taking one's skill and practice to the next level. However, I am not willing to say that a young, driven, forward-looking venture professional is unable to accelerate their maturation (and ultimate success) by doing these things. I think they can. But there is little doubt in my mind that experience and the data it generates is a helpful asset in becoming a successful venture investor.

But what the hell do I know - I've only been doing this for eight years. The comments above merely represent my experience to date and observations of those whom I perceive to be successful and whom I respect a great deal.

Re: Thoughts on VC portfolio construction

infoarbitrage — Sun, 18 Mar 2012 15:14:46 -0000

Rich, you mis-read the part to which positive skewness applied. I was comparing a portfolio of late-stage investments to a portfolio of early stage investments. When I refer to isolating upside vol in early stage managers, it is with respect to creating a floor through intelligent diversification while still preserving a positively skewed return distribution. And yes, I could have used options pricing as a metaphor but elected not to.

Re: IA Ventures

infoarbitrage — Thu, 01 Mar 2012 23:21:22 -0000

Awesomeness. Thanks, Mark!

Re: The data scientist v2.0

infoarbitrage — Thu, 01 Mar 2012 18:20:36 -0000

Great comment, Aaron. I'm with you 100%.