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Jens
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1 month ago
in My Google Talk On Disruption on A VC
Politics. And public administration in particular.
Both are ripe for disruptive change. At the politics end, the Obama campaign was just a start. At the administration end, I expect to see far more local, regional and national public sector administration to get impacted by the Internet. This is just starting to happen, you blogged about it just a fed days ago.
Both are ripe for disruptive change. At the politics end, the Obama campaign was just a start. At the administration end, I expect to see far more local, regional and national public sector administration to get impacted by the Internet. This is just starting to happen, you blogged about it just a fed days ago.
1 reply
fredwilson
Yes. But can that be profitable too?
2 months ago
in The Venture Capital Math Problem (continued) on A VC
Fred,
this is a 'black swan' issue. Extremely wild swings in exits are part of the game. By calculating them out, you miss everything that is important about VC as an asset class.
LPs want exposure to this asset class exactly because of this situation. In what other asset class can you get a 100x on investment when you hit a real outlier?
The average is not the point. It is the extremes at the positive end of the 'value at risk chart' that make VC as an asset class interesting.
Let me put it another way: take Twitter out of your portfolio. Let's see how happy your investors would be with your job then ;) But seriously, by calculating VC the way in which you do it, you do everything that Taleb tells people not to do. Have another look at the black swan book, it has big implications for what you try to do.
BTW: I twice calculated the money in vs. money for a parts of the UK VC ecosystem. Once for biotech, once for the Cambridge Cluster. In both cases, there was more money going in than money going out, if you excluded the outliers. It is the outliers that make this asset class.
this is a 'black swan' issue. Extremely wild swings in exits are part of the game. By calculating them out, you miss everything that is important about VC as an asset class.
LPs want exposure to this asset class exactly because of this situation. In what other asset class can you get a 100x on investment when you hit a real outlier?
The average is not the point. It is the extremes at the positive end of the 'value at risk chart' that make VC as an asset class interesting.
Let me put it another way: take Twitter out of your portfolio. Let's see how happy your investors would be with your job then ;) But seriously, by calculating VC the way in which you do it, you do everything that Taleb tells people not to do. Have another look at the black swan book, it has big implications for what you try to do.
BTW: I twice calculated the money in vs. money for a parts of the UK VC ecosystem. Once for biotech, once for the Cambridge Cluster. In both cases, there was more money going in than money going out, if you excluded the outliers. It is the outliers that make this asset class.
2 replies
azeemazhar
Jens
If the outliers 'make the asset class' then it isn't an asset class but rather a bet, since you really need to model the predictability of that. In a way, the investments need to make sense without the blow out successes because those successes are actually highly concentrated towards a few firms.
It is less about what Fred does and more about what his LPs do. For all his wisdom, Taleb doesn't offer anything better than Fama-French, which if treated properly and a bit of perspective can still be a very useful guide.
So I fundamentally think that the problem has arisen around incentives: excellent salaries and very little committed up-front by GPs. The theory tells you that GPs are heavily invested in their own funds. The practice is that 'heavily invested' may mean 1% of the capital comes from GPs (and that 1% might not represent the vast bulk of a GP's assets excluding their primary home). In fact I have heard of funds lending their GPs the GPs own commitment to the find to be set against their future carry. Nice work ;)
I don't know the situation within Fred's firm but it would be interesting to get a sense of what those levels of commitment are.
If the outliers 'make the asset class' then it isn't an asset class but rather a bet, since you really need to model the predictability of that. In a way, the investments need to make sense without the blow out successes because those successes are actually highly concentrated towards a few firms.
It is less about what Fred does and more about what his LPs do. For all his wisdom, Taleb doesn't offer anything better than Fama-French, which if treated properly and a bit of perspective can still be a very useful guide.
So I fundamentally think that the problem has arisen around incentives: excellent salaries and very little committed up-front by GPs. The theory tells you that GPs are heavily invested in their own funds. The practice is that 'heavily invested' may mean 1% of the capital comes from GPs (and that 1% might not represent the vast bulk of a GP's assets excluding their primary home). In fact I have heard of funds lending their GPs the GPs own commitment to the find to be set against their future carry. Nice work ;)
I don't know the situation within Fred's firm but it would be interesting to get a sense of what those levels of commitment are.
6 months ago
in Traction or revenue on The Equity Kicker
I don't understand the difference, but maybe I am not thinking straight:
1) I think you should ALWAYS try to get to the point of generating meaningful revenue as quickly as you can, however,
2) If you are an advertising-based company, then generating meaningful revenue might not be possible until you reach a certain point. In which case 'as early as you can' simply means somewhat later. So, obviously you should focus as much as you can on getting to that point as quickly as you can. That means focusing on traffic.
The current environment doesn't change this one bit.
What has changed though is that 'meaningful' is suddenly somewhat less than it was before, so people are trying to bring money in earlier than a few years ago.
Does that make sense?
1) I think you should ALWAYS try to get to the point of generating meaningful revenue as quickly as you can, however,
2) If you are an advertising-based company, then generating meaningful revenue might not be possible until you reach a certain point. In which case 'as early as you can' simply means somewhat later. So, obviously you should focus as much as you can on getting to that point as quickly as you can. That means focusing on traffic.
The current environment doesn't change this one bit.
What has changed though is that 'meaningful' is suddenly somewhat less than it was before, so people are trying to bring money in earlier than a few years ago.
Does that make sense?
1 reply
brisbourne
Jens - I think the point is that the revenues available before you get to critical mass in traffic are not meaningful in the context of a venture funded business.
The credit crunch has probably changed that a bit, but not too much. IMHO anyway.
The credit crunch has probably changed that a bit, but not too much. IMHO anyway.
6 months ago
in Twitter as full-fledged publishing platform on Online Media Cultist
Have been thinking along exactly these lines just this week. I guess this might be the tipping point for twitter.
What I found is this: Twitter by itself is actually unusable. BUT, when you use it with all the 3rd part apps such as TweetBeep and Twitterific, then it suddenly becomes very very interesting.
I see Twitter as a platform now. But the value arises out of the apps. In a sense, Twitter could be like an email standard. A standard that allows people to communicate in particular way. But if you want to have that really cool Email program: then you gotta pay...
What I found is this: Twitter by itself is actually unusable. BUT, when you use it with all the 3rd part apps such as TweetBeep and Twitterific, then it suddenly becomes very very interesting.
I see Twitter as a platform now. But the value arises out of the apps. In a sense, Twitter could be like an email standard. A standard that allows people to communicate in particular way. But if you want to have that really cool Email program: then you gotta pay...
1 reply
Eric Berlin
Jens, I agree with part of what you said very strongly, and disagree on another point.
You say that "Twitter by itself is actually unusable." I use the "basic" Twitter service -- through the web interface -- much of the time and personally get a great deal out of it. Totally agree that 3rd party apps enhance the base service greatly.
You make an amazing point positing a future twitter freemium account. People such as Jason Calacanis have long called for a "professional" version of Twitter that charges subscription, and something like what you mention could end up being a part of that mix.
You say that "Twitter by itself is actually unusable." I use the "basic" Twitter service -- through the web interface -- much of the time and personally get a great deal out of it. Totally agree that 3rd party apps enhance the base service greatly.
You make an amazing point positing a future twitter freemium account. People such as Jason Calacanis have long called for a "professional" version of Twitter that charges subscription, and something like what you mention could end up being a part of that mix.
11 months ago
in Venture Fund Economics: Gross and Net Returns on A VC
For carried interest, you mean that you net 20% of the money distributed to LPs after you have returned $100m to LPs?
1 reply
fredwilson
In the case of this model, yes.
But not all funds are required to return the entire amount of their
investors capital before taking carried interest fees
Some are, including our 2004 fund
fred
But not all funds are required to return the entire amount of their
investors capital before taking carried interest fees
Some are, including our 2004 fund
fred
11 months ago
in Venture Fund Economics on A VC
This is an important point.
Venture Xpert etc have no way of measuring net returns, they can only look at a money invested vs. exit volume multiple. This is highly misleading. It ignores transaction costs (lawyers, bankers, etc), the shares that goes to founders and management, and it ignores management fees and carry. I have put together a quick spreadsheet that includes the costs here:
http://jenslapinski.wordpress.com/2008/08/03/ve...
Would love to hear your view on this.
Venture Xpert etc have no way of measuring net returns, they can only look at a money invested vs. exit volume multiple. This is highly misleading. It ignores transaction costs (lawyers, bankers, etc), the shares that goes to founders and management, and it ignores management fees and carry. I have put together a quick spreadsheet that includes the costs here:
http://jenslapinski.wordpress.com/2008/08/03/ve...
Would love to hear your view on this.
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