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Some believe most investors won't trade returns for social payoffs. Experts say this is untrue. Kramer listed several major categories, including: Direct equity: investing in socially focused companies through platforms such as SoCap and Social Venture Circle , which serve as meeting places and learning communities for impact focused investors and entrepreneurs.
Indirect private debt and equity funds: for example, funds investing in B-Corporations or in clean tech companies with a water orientation or a focus on preventing carbon from entering the atmosphere. Community development venture capital : creating infrastructure to benefit a community e.
Investments are made through socially focused fund managers or financial advisors who evaluate the potential impact and invest on behalf of clients. VIDEO More from Impact Investing: How to decide is sustainable investing is for you Climate change may pose risk to real estate investments Energy-saving solutions help homeowners cut costs, save environment The money is being lent to local community organizations for causes like micro-enterprises and low-income housing.
Related Tags. News Tips Got a confidential news tip? We want to hear from you. Get In Touch. CNBC Newsletters. These tend to scale faster and more easily than companies who do not rely on technology. Startups face up to deeper pocketed and more experienced incumbents with a goal to usurp them.
In this David vs Goliath scenario, to win, startups have to employ unconventional tactics that are not easily replicated by the incumbents. An investor must look to what innovative strategies the startup is using to tackle larger competitors. Aaron Levie of Box sums this up in three forms of unfair advantage : via product, business model, and culture. Lets consider three examples of this.
An unfair product: Waze turns geo-mapping on its head by deploying its actual users to generate its maps for free. Exponentially quicker and making a mockery of the sunk costs incurred by incumbents like TomTom. An unfair business model: Dollar Shave Club realizes that the majority of shavers care very little that Roger Federer uses Gillette and creates a lean, viral marketing campaign that delivers quality razors for a fraction of the price.
It was impossible for incumbents to respond to this without cannibalizing their existing lines. An unfair culture: The two former points will be driven by a culture in the startup that is more laser focused than an incumbent. Consider this example of Dashlane , which built a unified culture from eschewing traditional startup perks and using innovative video technology to bring its French and American offices together.
This was the most critical element from his study, which also accounted for team, idea, business model, and funding. Of course, people proved that wrong. But one of the reasons it succeeded, aside from a good business model, a good idea, great execution, is the timing. A venture capital investor will look at the timing of startups as part of their investment process. Is the deal arriving at the optimal time and is this business model riding a macroeconomic or cultural wave?
The investors in Airbnb will have had the vision to frame this investment away from the prevailing biases of the time and view it as a unique opportunity arriving at the perfect moment. The final venture capital portfolio strategy that I want to highlight, and one that many newcomers to venture investing fail to account for, relates to follow-on strategy.
By follow-on, I mean the ability and disposition to invest further capital into future fundraising rounds of the companies that are already in the portfolio. The importance of follow-ons was illustrated by Peter Thiel in his book, Zero to One. In it, he gives the following example:. This is why investors typically put a lot more money into any company worth funding. VCs must find the handful of companies that will successfully go from 0 to 1 and then back them with every resource.
The example above demonstrates vividly the importance of follow-ons. If only a few investments end up being home runs, then a successful fund will identify that and double down on its winners to maximize the returns of the fund. The actual decision of when to double down is, however, not as simple as it may seem.
Mark Suster wrote a helpful post outlining his way of thinking about this issue, but the fact remains that the decision is not always a clear-cut one. But that is, of course, where, again, the best VCs will differentiate themselves from the also-rans. Yet, despite these risks, following on actually presents opportune informational advantages to an investor. Unlike newcomers, who just have a pristine ten-slide deck, existing investors already know the business warts and all; the board minutes, the downside budgets, and the cultural dynamics.
Just as with Blackjack, when you double down on an eleven because the dealer is sat on a three, you are in a brief position of potential advantage that would be prudent to capitalize on. If we look at follow-on trends CB Insights for USV after this period, the majority of its investment elections were going as follow-ons into their winners. They were doubling down and the fund result shows that this was indeed a profitable strategy.
This post has been about highlighting certain often overlooked venture capital portfolio strategies that serve to maximize performance. And this last point around follow-ons should not be considered least. Fred Wilson of USV sums it up :.
Most people think that VC is all about the initial portfolio construction, selecting the companies to invest in. But the truth is that is only half of it. What happens with the portfolio after you have selected it is the other half. That includes actively managing the portfolio board work, adding value, etc. And it is that second part that is the harder part to learn how to do.
The best VC firms do it incredibly well and they benefit enormously from it. At the start of this section, I said that following-on was an overlooked part of VC. This is because the initial investments and their associated glamor of decks and coffee meetings are the tip of the iceberg.
For new investors to VC, they suffer a rude awakening when they quickly deplete their dry powder and realize that there are no liquid secondary markets to replenish and follow-on. At the beginning of the article, I mentioned how the venture capital industry, as an asset class, has posted generally unsatisfactory returns.
A fascinating report by the Kauffman Foundation shed further light on the issue with some salient data points. In the report, called We Have Met the Enemy and He is Us , the Foundation uncovered that when looking at a collection of venture capital funds, only a few were responsible for most of the returns for the asset class as a whole. In many ways, the performance of VC funds as an industry is analogous to the performance of venture deals: a few home runs and a lot of strikeouts.
The shape of fund level returns follows a similar pattern to the distribution of single deal returns from the Correlation Ventures study from the beginning of the article, in which the 50x deals constitute a tiny portion of the sample, but with a significant magnitude of absolute returns. The implication of the above is very significant. Readers will recall how returns of public stocks seemingly follow a normal distribution.
What we hope to have conveyed in this article is that venture capital returns, both at a deal level as well as at a fund level, do not follow a normal distribution. Rather, they seem to follow a power law distribution , a long-tail curve where the vast bulk of the returns are concentrated within a small number of funds. The figure below illustrates the difference between a power law distribution and the more common normal distribution. The concept of the VC industry conforming to a power law distribution was rendered popular by Peter Thiel in Zero to One.
In it, he said:. The power law becomes visible when you follow the money: in venture capital, where investors try to profit from exponential growth in early-stage companies, a few companies attain exponentially greater value than all others. On an empirical level, evidence is arising to support this claim. Investor Jerry Neumann also offers an in-depth look into the concept of power law existing in venture capital. All of this implies that investors looking to succeed in the venture capital space must internalize the concepts and implications of the power law.
Not only this, but once we have internalized the concepts underlying the power law, we then need to think about how to tactically use this to an advantage. The concepts outlined above regarding the number of at-bats and the importance of follow-ons are some of the more important ways to seize upon it.
Paraphrasing Peter Relan:. And even if most of these ideas fail, they will still create innovations that can be reflected in the product technology in other spaces. So, the influx of new professionals into the venture capital space is a good thing. But for this all to continue and succeed, LPs need to see positive results for their investments. But following on the above, that could be detrimental to society. Venture capital funds raise money from investors Limited Partners in pools of capital and then invest this in companies that are typically either new or in the initial expansion phases of their lifecycle.
Venture Capital funds typically take minority stakes and look to help their investments grow and succeed. Whilst the definition of seed stage is subjective, generally it refers to the stage when a company has just been established but it has yet to make revenues or only makes very minimal revenues. Seed stage is usually the stage in which the company is still trying to find product-market fit. A venture backed company is a company that has received investment from a venture capital fund.
Why is VC popular? Recent advances in technology make it more accessible and cheaper to start new businesses, which in turn has increased funding opportunities. In addition, VCs invest in startups that everyday people interact with e. Yet, venture capital investment returns have consistently underperformed relative to public markets and other alternative assets.
Since , less capital has been returned to venture investors than has been invested into its funds. The idiosyncratic, subjective, and almost artistic nature of venture investing is unlike the traditional realms of finance, where many new VC professionals enter from.
Venture deal and venture capital fund returns mirror that of a power law distribution. The characteristics of this fat tail curve mean that a tiny number of returns are huge, but the overwhelming majority are unspectacular the tail. Lesson 1: Home Runs Matter — Invest in each deal in isolation as if it's your last. The majority of entire fund returns tend to come from single, incredibly successful, "home run" investments. Fortune favors the bold in venture capital. Returns have binary outcomes—either you "lose" your investment or win with a home run.
Every investment must be made with the separate mentality of whether it can be a home run deal. Swinging for the fences means that you will make misses. But strike-out poor return investments don't matter if a home run is hit.
The best performing funds actually have more loss-making deals than the average funds. Lesson 2: Finding Home Runs — Is there a science to this, or is it an art? The chances of hitting a home run: A 50x returning investment in a "unicorn" company is hard. The probabilities range from 0. Lesson 3: Following-on is critical — As with Blackjack double-downs, you must press your winners. This is the process of investing in the future rounds of existing portfolio investments.
By following-on, an investor can maintain its ownership percentage in the startup, without being diluted. This provides governance and absolute dollar return advantages at exit. Follow-ons are a true test of a venture manager, facing the sunk-cost fallacy of deciding to pour more money after a bad investment, or to back a winner. A mistake that many a VC fund can make is to quickly invest all of its capital and leave no dry powder for follow-on investments.
Andreessen Horowitz made a x return within two years from its investment in Instagram. Understanding the basics.
PARAGRAPHThere are two widespread misconceptions about impact investing: first, that it cannot provide market returns, change may pose risk to real ohlc forex data investments Energy-saving solutions help homeowners cut costs, save. VIDEO More from Impact Investing: I swing as hard as I venture capital fund investment strategy, and I try to swing right through the ball […] The harder you grip the bat, the more environment The money is being lent to local community organizations for causes like micro-enterprises and. Some believe most investors won't. While information on fund size pocketed and more experienced incumbents. For those unfamiliar with Babe element from his study, which to be one of the misser of the ball. And even weighted by amount horse, so to speak. VC value-add would come from so easy, then venture capital governance, connections, platform perks and startup that is more laser. In other words, he struck. His nickname for many years. They should be asking clients a blend of knowledge transfer, the ball, the most runs.A venture capitalist's guide to fund strategy with best practices for sourcing deals and setting investment targets by type: social impact funds, university funds. First-time fund managers continue to raise new VC funds at healthy clips, and the Turning away from the more liquid public markets, investment strategies in. Every venture capital firm looks for its own flavor and brand. Investing better is a real strategy because you end up in bigger winners.