
Definitions on the Economics of VC - runesoerensen
http://a16z.com/2016/09/11/vc-economics/
======
mbesto
This is the key takeaway:

> While VC dollars are a significant source of capital for facilitating new
> business creation, the total capital deployed is remarkably small.

And oddly it gets a disproportional amount of media coverage:

[http://avc.com/2016/08/understanding-
vcs/](http://avc.com/2016/08/understanding-vcs/)

[http://www.forbes.com/midas/](http://www.forbes.com/midas/)

~~~
randoramax
[https://hbr.org/2014/08/venture-capitalists-get-paid-well-
to...](https://hbr.org/2014/08/venture-capitalists-get-paid-well-to-lose-
money)

Quoted from the hbr article above:

" 2013 annual industry performance data from Cambridge Associates shows that
venture capital continues to underperform the S&P 500, NASDAQ and Russell
2000."

Why institutional investors throw money at VC instead of much better options?

~~~
anthony_james
Just because the aggregate of VC firms under perform doesn't mean there are
exceptions.

When you invest in market indexes, your gains are relatively capped. There's
more volatility in venture capital, but that's the idea - some years you're in
the dumps, other times you're investing in Dropbox, AirBnb and Uber, at the
same time.

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chollida1
> Now, fast forward to when the fund is over; most funds have a 10-year life
> with two or three 1-year extension periods. Assume that all of the $140
> million in interim marks proved ephemeral and all of the companies that
> comprised those marks proved to be worth no more than the paper this post
> was originally written on. In our last example, the fund generated only $60
> million in total returns on a fund of $100 million, but the GP distributed
> $12 million to itself back when the prospects for the fund were looking up.
> In this case, the GP has over-distributed to itself and is subject to what’s
> called a “clawback” — the money needs to get returned by the GP to be
> distributed to the LPs. That sucks, but is fair in that the GP never would
> have been entitled to that money had it waited to distribute the $60 million
> until the fund was over.

I find this to be an interesting divergence from a typical hedge fund. For a
hedge fund the end of year number is everything.

For instance if you start the year with $100 million in assets and finish the
year with $110 million even if none of the gains are realized, then under a 2
and 20 model you keep 2 million for your bonus pool. Next year if you end up
down such that you end up back at $100 million you don't give back the
previous 2 million in performance fees, that's a completed transaction.

Now some funds have a high water mark, which means you don't earn performance
fees again until you get above your previous year end high, but not all funds
have such a requirement.

It must be tough for VC funds to pay out bonuses when you can't really claim
realized gains until after the entire fund is closed.

I guess this leads to a focus on two things:

1) the management fee to help smooth cash flow over, which means most VC funds
probably wont' lower their management fee and additionally this may incentives
the VC to try and raise as much as possible, even if this excess capital might
be a drag on returns.

This focus on management fees does happen in the hedge fund world, but I know
quite a few funds that only take 1% or 0.5% as a management fee and take a
larger portion of the gains 30% in return.

2) This benefits established funds as they'll have retained earnings from
previous funds to help pay key people for their work on a current fund while
its waiting on cashing out its returns. Especially important in today's
environment of companies staying private longer.

~~~
connoredel
IIRC, the lead for an angel syndicate can make deal-level carry (as opposed to
the fund-level carry that is described here). This leads to some incredible
risk-taking: there is no consideration for how they might be harming their
"fund-level return" (i.e. the return on all the investments they as an
individual have participated in) -- and they don't really care because that
isn't their biggest opportunity. The biggest opportunity is the carry they can
make on this _one deal_ if it's a home run. So the average angel who is just
participating (and not leading) has a really risky portfolio.

[http://avc.com/2016/02/fund-level-vs-deal-by-deal-
carry/](http://avc.com/2016/02/fund-level-vs-deal-by-deal-carry/)

------
epLUsueJ
> Most VC funds entitle the GP to earn a carried interest — a portion of the
> profits of the fund — of 20%

Unless you are A16Z and then it is 30%

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lifeisstillgood
For me I struggle with why, like science spending, there is not more, a lot
more, VC funding. It's hardly like there are too few people hanging out
shingles.

YC was trying to change the game but I may be missing where the VC industry is
throwing money out the windows - except possibly I one small part of a city on
the west coast. Or am I looking in the wrong place. The article claims 28bn in
new funds, but 3 trillion in hedge funds and world GDP is what 13 trillion?
That's about 0.2%. Seems low

~~~
smallnamespace
That 0.2% is just to get things off the ground and see whether the idea works.
Successful ventures just raise money on the normal stock exchange.

Put another way, should we be spending, 5%, or 10% of world GDP annually on
risky ventures that probably won't work? Are there really that many untried
ideas that need that level of funding?

~~~
lifeisstillgood
put it this way, Universal Basic Income is supposed to free humanity up to
perform those innovative tasks we always mean tondo but cannot due to the
drudgery of work

I naively assume that if we all have tenure, we will see a third of humanities
time on art, a third on science and a third on "new businesses". Plus a third
on sex...

So mentally I am asking if we were free to choose, why is the delta between
2/3 and 0.2% so huge.

------
lifeisstillgood
Re: Columbus' voyage as a VC investment - it made me reread an old blog post
and chuckle :
[http://www.mikadosoftware.com/articles/columbus](http://www.mikadosoftware.com/articles/columbus)

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Kinnard
I'd shy away from Isabella and Columbus . . . murderous, rapacious, relgious
fanatic, imperialsist isn't a good look for a VC.

~~~
chris_7
Keep in mind that this is the VC that said that they should be able to take
back the stock of employees that quit. (obviously that doesn't compare to the
horrors of Columbus)

~~~
snarf
Wow, can you elaborate? These guys typically paint themselves to be very
founder and employee friendly.

~~~
chris_7
[https://news.ycombinator.com/item?id=11963551](https://news.ycombinator.com/item?id=11963551)

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thesausageking
The firm doth protest too much, methinks.

~~~
ryporter
What are they protesting? This is an informational post.

