…or how important winners are to venture returns and how difficult it is to find them. Excerpts from a recent Seth Levine post (emphasis added):
Based on their data, a full 65% of financings fail to return 1x capital. And perhaps more interestingly, only 4% produce a return of 10x or more and only 10% produce a return of 5x or more.
…This really underscores the challenge of creating a venture portfolio that produces reasonable returns. If you were to actually construct a portfolio based on these averages, a $100M venture fund investing in 20 companies would produce a gross return of approximately $206M (that’s before fees and expenses). The resulting fund would have an IRR in the range of 10% (the exact IRR would depend on the timing of the cash flows, but I constructed a few models to approximate this and 10% was the average return). That’s hardly something to write home about and underscores the challenge of being “average” in this industry.
Hidden in this exercise – and perhaps more important – is the challenge of finding companies at the right side of the distribution chart. In my hypothetical $100M fund with 20 investments, the total number of financings producing a return above 5x was 0.8 – producing almost $100M of proceeds. My theoretical fund actually didn’t find their purple unicorn, they found 4/5ths of that company. If they had missed it, they would have failed to return capital after fees. Even if we doubled the number of portfolio companies in the hypothetical portfolio, a full quarter of the fund’s return comes from the roughly ½ of a company they invested in that generated 10x or above. Had they missed it, they would have produced a return that roughly approximated investing in bonds – not the kind of risk adjusted return they or their investors were looking for.
…All of this math simply underscores how important winners are to venture returns and how difficult it is to find them.
Here’s the sobering chart that accompanied the post:
Related Posts: A very sobering and a humbling reminder..
Looking forward to a “Twilight Taster Session” on Social Entrepreneurship at London Business School this evening!
Looking forward to a panel discussion on social entrepreneurship at Imperial next month.
After the period of financial turmoil of last few years, there is increasing awareness today that businesses that are solely motivated by bottom line and pure financial profit may be less beneficial for society at large as compared to those who measure their contribution in other ways as well. Many businesses and entrepreneurs now incorporate social costs in their financial decisions. And more companies than ever before are engaged in a serious effort to define and integrate corporate social responsibility into all aspects of their businesses. Whether such companies will eventually outperform those that disregard such measures is something only time will tell.
In this session we will discuss the impact of social strategies on the growth and success of companies.
I will be joined by Susannah Nicklin, CFA, UK Liason, GIIN, Sinead Brophy, CEO, My Support Broker CIC, and Director, The SBC Partnership and Daniel Becerra, Managing Director, Buffulo Grid..
Stay tuned for more…and for further information, please contact firstname.lastname@example.org
Tomorrow afternoon in Mumbai, I’ll be discussing “Understanding, Driving and Adapting to Change” in contemporary India on a panel discussion with 75+ MBA grads from London Business School who are in India on a “Global Business Experience“. I will be sharing my efforts to drive change and systemic reforms in India via political activism..
I will be joined on the panel by Rashmi Bansal, Mukesh Mehta and Gaurav Mehta…Hope to share more details of the interaction soon..
From my latest post over at Times of India:
“…Did you know that more than 80 percent of the cycle-rickshaws in Delhi are illegal (since there are only 99,000 of them allowed legally)?
Govt functionaries in Delhi extort a crore a month from the cycle-rickshaw pullers alone! This was the figure in 2006. It has probably doubled since then.
Were you aware that Delhi’s approximately 600,000 street vendors operate without the necessary license and pay up about Rs 12 million per month in bribes?
Were you aware that a law in the state of Maharashtra requires farmers to sell their sugar cane to a specified sugar mill in the district[i]?
Did you know of the law in Kerala which mandates that once a farm is registered as producing one crop, it cannot change its crop without government permission[ii]?!
Would it now surprise you to know that “India ranks among the world’s worst countries at encouraging entrepreneurs. For ease of starting a business, India is 166th out of 183 countries”
Or that it takes 7 years (yes, seven) to close a business in India and 1,420 days to enforce a contract!
You would think this is a bad joke – except it is not.
And millions of small entrepreneurs suffer from this stranglehold of regulations and permits; the vestiges of a still omnipresent (and deeply embedded) license-permit Raj.
Which brings us back to our question: What can the government do?”
Read it in full here.