

The Venture Capital Math Problem - AlleyRow
http://www.avc.com/a_vc/2009/04/the-venture-capital-math-problem.html

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navanit
My comment on the blog repeated here:

"You correctly assume that the distribution follows a power-law, but you apply
an arbitrary constraint on the maximum ($5bn). You constrained the maximum and
then concluded that the distribution is not scalable!

Even if historically VCs haven't had a larger than $5bn exit, there is no
reason it won't happen in the future. Unless VCs have some sort of self-
imposed upper-bound on exits, this asset class is perfectly scalable as long
as VCs have the intestinal fortitude to hang on to some hits for longer than
they have in the past. (Also they need to invest in earlier stage startups and
diversify more than they think they need to, to benefit even more from
scalability). "

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pg
"If $100bn per year in exits is a steady state number"

This is the mistake. Why should this be constant?

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knightinblue
How (and using what number) would you phrase it then?

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pg
The limit on the value of exits is the amount of wealth that can be created.
If there is a limit on that, it's in the realm of science fiction.

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tomsaffell
I think FW's mathematical approach probably is flawed, but I think underlying
it there might be something of interest. I read it as: _the creation of wealth
by new ventures requires resources, which can be split into two types: funds,
and everything else. The two resources need to be present at a certain (range
of) ratio(s). There is a finite supply of the 'everything else' (e.g. people
who thrive in a start-up environment, consumer willingness to adopt new
things, etc), therefore the demand for funds is finite, i.e. VC is not a
(infinitely) scalable asset class._ That's a theoretical argument, and you
might well say, "fine in theory, but in practice we're nowhere near hitting
the limit of supply of everything else". Implicitly he seems to be suggesting
that we are (via his assertion that total exit values is fixed) - that seem
like the wrong way to address the 'limit of supply question' (because it looks
at outputs, not inputs), but I think the limit question is still a valid one
to ask. Personally, I really don't know whether we're anywhere near the 'limit
of supply of everything else', but I hope not. Would love to hear what others
think on this question..

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fredwilson
it's not probably flawed. it is flawed.

most of the posts i write are designed to stimulate discussion, debate,
highlight an issue i think is worth talking about, etc

the comments on this post have been fantastic. i am already thinking about the
problem differently, but i still think the VC asset class doesn't scale and
that we have too much money under management right now.

