VC’s are marketers, not financiers
Why storytelling is more important than financial acumen in Venture Capital
Hi folks, Patrick Ryan here from Odin. We are building the ultimate tool for angel syndicates to invest together in private companies and funds, via SPVs.
Venture capital is the only asset class where the seller cares who the buyer is.
Unlike other asset classes, where past performance is rarely an indicator of future success, past performance in the venture industry is a very good indicator of future success.
Since entrepreneurs prefer to work with investors who have achieved successful exits, such VCs enjoy a higher likelihood of working with the best startups, and thus a higher probability of successful exits.
And so on.
The “power law” of VC returns applies to VC funds as well as to individual startup investments. Most VC’s don’t generate market-beating returns.
So how do you break into VC as a new fund, and beat the odds?
VC is fundamentally about two things:
To get both without a track record, you need to be good at telling stories.
The stories you tell explain why you are great and how you can add value. Hopefully, they are true stories.
Thus, this is marketing, not finance.
It’s a tough, competitive market out there for VC’s, and in reality most funds won’t generate market-beating returns.
In many ways it is a better time to be a founder than a VC at the moment.
There is a lot more branded cash around than big, original ideas.
Love the format!
One question: "Is past performance ... a very good indicator of future success."?
Intuitively, that makes sense. But with 10+ year funding cycles, it's difficult to say definitively.
1. Emerging venture fund managers often have the best returns: "First-time managers outperformed experienced managers for 2006-2014 vintage venture capital funds"
• The median net IRR for 2006-2014 vintage first-time venture capital funds (+12.9%) sits a full 3% points higher than that of experienced managers (+9.9%), with risk levels (measured by standard deviation of net IRR) at 19.1% and 15.6% respectively. 13 of 16 years measured from 2000-2016, first time fund managers performed better, on average, than their older vintage counterparts. See https://docs.preqin.com/reports/Preqin-Special-Report-Up-and-Away-Launching-First-Time-Venture-Capital-Fund-November-2017.pdf
2. Also, how long a manager is in the VC game does not seem to correlate with better returns:
Am I missing anything?