Category Archives: Venture Capital

What to expect from an investor?

Leave a reply

I am again taking advantage of the questions asked to me to write a post (after the one on the impact of the personality of founders on the success of startups). I could have titled this post “what do investors expect?”, I look here at both subjects.This time, I even copy a part of the message I received:

Context: Just to share with you the dynamics of investors (very early stage) who look at my project. I have received 10+ requests, sometimes from investors who want to make an initial contact call (to follow developments in typically 6 months). Some display their investment thesis upfront (sometimes stratospheric expectations). I try not to waste too much time with such requests, to focus on my product (and Product-Market-Fit – PMF, *the priority*!), but what do you think of this typology of investors? Very early, who favor the blank page vs. PMF but with enormous expectations (100x potential ROI).
(I know that several entrepreneurs are experiencing a bit of the same thing at the moment). I can’t imagine how a founder can calmly seek his or her PMF having onboarded this type of VC and under their pressure (100x and not 10 or 20x!)…
Questions :
1) Are they intrinsically better or worse than more “common” funders (5x-7x under ~5 years, or 10x under 7-10 years)? (I’m exaggerating on purpose, of course).
2) The less-pressing alternative would be a collection exclusively made up of BAs and/or BA-Networks, but does the absence of institutional SEED investors send a bad signal to VCs? A sign of too little ambition? A potential lack of initial attractiveness?
3) There is a strong trend towards “leaner startups” which give less and less equity in pre-seed / seed (including to YC). However, institutional investors often want a double-digit equity share. What is your vision/experience in European VCs? Is leaner (equity shared) better or less attractive? Many startups (even at YC) do not give more than 10% of total equity across the SEED round (+ the initial 7% from YC, or other more or less equivalent SAFEs).

I answered a little quickly like this and I’m going to add a little more, notably a new update: an update of my pdf of cap tables, which includes more than 900 companies now…

This is a true wrong question! But I’m not an entrepreneur, I’m a mentor!
The main thing is the added value of your investor in two dimensions:
– the amount invested,
– the quality of advice.
We could almost say that if one of the two dimensions is zero then the other must be very high, and we can therefore accept that one is weak.
You dream of having a renowned VC or BA (her name and her credibility), this undoubtedly has a price!
Then the lower the amount, the greater the expected multiple. If you put 10k you hope to make x1000, if you put 100K you hope to make x100 if you put 1M you hope to make x10.
In reality it’s more a question of stage, in series D, E, F, it’s probably 2x-3x, in A, B it’s 10x, in seed, it’s 100x, in pre-seed it’s 1000x
– Google had David Cheriton and Andy Bechtolsheim as BAs, they put in 100k, I think they made 400M…
– Sequoia and KP put in $12M and made $2B
(see page 47 of the pdf, $85/$0.06 and $85/$0.52 for the multiples at the IPO but they sold at least six months later and I think it was worth at least 3x or 4x more)
On the last point, it’s not easy either, but Stanford had around 2% of Google at the time of creation, which is unusually low and it is paradoxically their biggest grain, we can see the diversity of criteria.

So let me add a couple of points. I thought Paul Graham (YCombinator) would have provided answers on his blog paulgraham.com but did not find an answer. Howver he keeps on writing great things like:
– How to start Google (March 2024) https://paulgraham.com/google.html
– Superlinear returns (October 2023) https://paulgraham.com/superlinear.html

The two figures that follow illustrate the explanations above. The pdf therefore gives more than 900 cap tables which can illustrate the diversity of multiples (theoretical at the IPO).
Finally, it is still quite rare for an investor to contact an entrepreneur directly (even if it can also happen). The contact is rather established by a third party who knows both the entrepreneur and the institutional investor, for example the Business Angel or the mentor…

Finally, the percentage given in return for an investment is not linear either. It depends on the stage of development of the company of course but on the amount itself!
– for 100k, we typically give 5-15%,
– for 1M it’s more like 40%,
– for 10M and more we fall back to amounts of around 10%.
This may seem counterintuitive and it shows that the percentages are not the result of accounting but of negotiations.
I add two recent French startup cap tables, Mistral AI and H.ai which show that exceptional fundraising leads to exceptional valuations and therefore unusual percentages. These were built with assumptions given my media or data from company documents.

The BA, business angel, is a wealthy individual who invests his own money (generally at least 100k per startup). Below we are talking more about F&F – Friends & Family.
VC (venture capital) invests third party money (pension funds, companies, banks, insurance companies, very wealthy individuals) generally with a minimum of 1 million per startup.
PE, private equity, is an institutional investment firm which takes less risk (even if the companies are not listed but generally profitable or with stable turnover). They invest large amounts but do not expect returns on investment as high as the VC.

Equity_List-Herve_Lebret-June_2024

Silicon Valley Bank and Venture Capital

Leave a reply

I have been very surprised by the bankruptcy of Silicon Valley Bank (SVB). Silicon Valley finance was (and I think still is) about venture capital and not banking, about equity and not loans/debts. So how is it possible that a bank fail by serving startups?

When I was in venture capital, and this is 20 years ago, startups would marginally borrow money. Banks indeed did not trust these fragile entities and they were statistically right. Of course startups could borrow money if they had sound collaterals like equipment and this is when Silicon Valley Bank and its peers were used by startups: for leasing for example (office space, equipment that could be reused).

Apparently things have changed as I recently learned. Some venture capitalists managed to convince SVB to go further. Money was cheap and if “powerful” VCs were financing a startup, then SVB thought the startup was solid.

As the article by the New Yorker below says, it appears to have been a combination of incompetent management, lax regulation, and some powerful people in Silicon Valley crying fire in a crowded theatre.

You may read additional material from the New Yorker with
– The Old Policy Issues Behind the New Banking Turmoil (March 13)
– Why Barney Frank Went to Work for Signature Bank (March 15)
Another interesting article is In Their Own Words: What Silicon Valley Bank Meant To The Valley

There is also this interview about Peter Thiel’s role in SVB collapse

Some quotes include :
“Silicon Valley has an image problem but remains hugely popular.”
“The issue is not that VCS are powerful but more not as smart as they think they are”.

Finally, there is no doubt that the money had become very easy, in too big quantity as indicated by the wikipedia page about SVB. The end of megarounds and the recent new startup crisis have played their part.

This probably needs to be looked at over the long term. When I wrote my book, I had a look at the correlations between the Nasdaq Index, VC fund raising and the economic crisis. Here is what it gave:

and here is what it looks like in 2022 with, among other things, the 2008 crisis

I post this article because I was invited to debate about Silicon Valley, Venture Capital and how can technology startups my impact the banking system on France Culture in Entendez-vous l’éco ? (in French). I now have to read the new book of the other guest, Olivier Alexandre, La tech. Quand la Silicon Valley refait le monde (Seuil, 2023) (Tech. When Silicon Valley changes the world) which seems very interesting. Probably a futrure post.

What makes Silicon Valley Venture Capital unique?

Leave a reply

Friends from IMF sent me a link to a very interesting article entitled How Unique is VC’s American History?. You may have access to it here or there. It is an analysis of a book, Tom Nicholas’ VC: An American History that I have not read (yet). But the article is quite fascinating about the lack of answers about Venture Capital uniqueness of and reasons for its success.

Let me summarize by quoting & emphasizing:

1- A theme throughout the book is that the development of the VC industry and the structure and governance of VC investments can be understood through the lens of the allure of long-tailed, highly skewed returns, whereby sparse successes need to make up for a multitude of failures. Nicholas argues that skewed, long-tailed payoffs are a distinguishing feature of VC and its American antecedents and suggests that part of America’s comparative success at VC may be due to Americans’ relative affinity for such payoffs. […] Like modern VC investments, nineteenth-century whaling voyages were long-term projects that faced huge risks. Ships could be lost at sea or fail to find whales, and even completed voyages could have disappointing payloads. The result was a skewed, long-tailed distribution of returns similar to that of modern VC. […] We agree with Nicholas’s conclusion that American historical precedents such as the financing of whaling and cotton-spinning technology, and others detailed in the book, are highly related to modern VC. There is also little doubt that American VC has been uniquely successful in the world. However, it is less clear to us that the historical precedent is unique to the United States, or even uniquely successful, making it difficult to draw a causal link between VC’s American history and the success of modern US venture capital. In particular, the Dutch in the 16th and 17th centuries established trading ventures to East Asia on a massive scale for the time. Like whaling, these earlier expeditions share many similarities with modern VC, including skewed, long-tailed returns and complex governance mechanisms. Yet a modern VC industry with similar success to the U.S. did not arise in the Netherlands.

2- We also agree that positively skewed, long-tailed returns are indeed a hallmark of VC. But long-tailed returns are by no means unique to VC. As we discuss in Section 4 below, long-tailed returns arise naturally as a consequence of long-term holdings of risky assets more generally, including for instance the returns of public equities if they are held for many years. Thus, it is difficult to ascribe too much of the governance and structure of VC to the long-tailed nature of its returns.

3- Nicholas describes the unique position Silicon Valley enjoys today as the result of an agglomeration over time of a number of factors, including returns to scale from academic innovation (largely from Stanford University), military investment, the presence of influential early firms that led to entrepreneurial spinoffs, the weather, immigrants, and of course the development of the VC sector. What is much less clear is whether the agglomeration is simply due to serendipity. For instance, William Shockley founded Shockley Semiconductor in Silicon Valley because he happened to have a desire to move back to the San Francisco Bay area from the east coast to care for his ill mother. Departing employees from Shockley Semiconductor in turn founded Fairchild Semiconductor, Intel, and the VC firm Kleiner Perkins, among many others. Had Shockley Semiconductor instead been formed on the east coast, in many ways a more natural place at the time, the evolution of Silicon Valley could easily have been very different.

Nicholas also outlines the genesis of some of Silicon Valley’s oldest and most successful VC partnerships. He stresses the different investment styles of the founding VCs. For example, Arthur Rock of Davis & Rock (later Venrock) emphasized investing in people, Tom Perkins of Kleiner Perkins focused on the technology, and Don Valentine of Sequoia Capital emphasized product markets. Each of these VCs was so successful that they are now legends in the VC community. Yet, given the disparity of styles, it is difficult to draw any firm conclusions about the makings of a good VC. Moreover, consistent with the long-tail distribution of returns, the reputation of each of these VCs was cemented largely on the basis of a few homerun investments, such as Kleiner Perkins’s early investment in Genentech. It is difficult to rule out the possibility that these few early successes involved a large portion of luck, which became self-perpetuating because of increased access to the best new ventures (Nanda, Samila, and Sorenson 2020). If so, like the eminence of Silicon Valley itself, the early success of these top-tier VCs may have been serendipity.

Probably all of this is well-known but I found it particularly convincing in its synthetic shortness.

The (Recent) Impact of Venture Capital on Startups

Leave a reply

I have regularly been puzzled with the (real) impact of venture capital on startups, their growth or even their success. A few days ago, I received an email from a friend with a very interesting table.

The measure of capital productivity is given by the ratio a/b where a is the startup revenue at the time of IPO and b is the amount of venture capital raised by the startup before going public. The 4 big tech companies are Apple, Microsoft, Amazon and Google, 4 companies founded before 2000. The ratio a/b is greater than 10. The recent VC or IPO deals give ratios below 1 and closer to 0.1.

So it was easy for me to look at my usual cap. tables (check here if you do not know what I talk about). I have now 880 companies and I sorted this a/b ratio over time. Here is the result:

I have 272 biotech startups and 361 in the Software and Internet fields (the others are hardware, semiconductor, energy, medtech companies mostly). I have the a/b ratio (which I call Sales to VC) by period of 5 years (the years of foundations of the startups). I also pu the PS ratio (the famous Market Capitalization to Sales or “Price to Sales” ratio). Indeed the ratio is “collapsing” from above 5 before the 90s to below 1 after 2000.

I have also separated biotech which is known to have startups going public with low revenue and the group of Software and Internet. The curves which follow are probably better illustrations. Quite striking!

I also looked at the profits (or losses) of the startups and computed the Profit to VC amount ratio. Here it is:

Biotech is different as companies were rarely profitable when going public and the ratio is quite stable since 1990. But overall, companies were profitable at IPO before 2000 (and sometimes highly profitable, so that I could not find a good axis scale for my figure). They are losing money since 2005 and apparently losing more and more.

All this is no real surprise. Mallaby in his recent book The Power Law has described the new trends in venture capital. Funds like Softbank Vision or Tiger Global are pouring tons of money in startups which try to capture market dominance, whatever the cost. So the capital productivity is decreasing at IPO with the hope of huge gains in the future. A very, very risky bet…

PS (dated April 22, 2022) : I was asked a question about startups in the energy / greentech field. This is indeed interesting. Couple of comments before providing an answer from my data. Greentech has never been a stable or profitable segment. Kleiner Perkins or Khosla Ventures, early entrants in the field, seem to have suffered a lot. In addition I have only 21 companies in my DB. You are right, it is stable but from the low range, with low sales to VC ratios and negative profits…

La question était : On a different note you have data only on Energy/green tech? what would you expect to see? I was wondering if for capex intensive businesses the trend is more weak as they already needed to raise a lot of capital.

The Power Law (part 5) – Sequoia Capital

Leave a reply

Sometimes I publish posts which may be unreadable, they might be more for myself, not for other readers. In a way, this blog is my second memory… so I am not sure this post is worth reading…

There have been two major venture capital firms in history. So important, I have created hashtags for them: Sequoia and Kleiner Perkins. So not surprisingly Mallaby covers them both in his great book, but in different manners. According to him, Kleiner Perkins (KP) has lost its leadership. Both Sequoia and KP were #1 and #2 from 1980 to 2005, but since, Sequoia has kept its ranking and KP is not even in the top 10 partnerships (see page 413). KP is covered in the last part of Chapter 11, with subtitle The decline of Kleiner Perkins. The full chapter 13 is entitled Sequoia’s strength in numbers.

Mallaby has a lot of convincing arguments, from the team strategy to the diversification of the firm activity: Sequoia has now large growth funds, a hedge fund, even an endowment, and a presence overseas in Israel, China, India and even recently in Europe. And Sequoia’s performance looks impressive: Taking all its U.S. venture investments between 2000 and 2014, the partnership generated an extraordinary multiple of 11.5x “net” – that is, after subtracting management fees and its share of the investment profits. In contrast the weighted average for venture funds in this period was less than 2x net. (Data from Burgiss). Nor was Sequoia’s achievement driven by a couple of outlandish flukes: if you took  the top three performers out of the sample, Sequoia U.S. venture multiple still weighed in at a formidable 6.1x net. Deploying the capital it raised in 2003, 2007 and 2010, Sequoia placed a grand total of 155 U.S. venture bets. Of these a remarkable 20 generated a net multiple of more than 10x and a profit of least $100M. (Proving it was not afraid of risks, Sequoia lost money on nearly half of these 155 venture bets.) The consistency across time, sectors, and investing was striking. “We’ve hired more than 200 outside money managers since I came here in 1989”, marveled the investment chief at a major university endowment. “Sequoia has been our number one performer by far”. [Page 320]

So I had a look at my own data. Here what I found about their fund history.

I also looked at my cap. table and found where Sequoia was an investor. When the data was available, I looked at how much the firm invested and what was the stake value at the IPO or acquisition. Indeed impressive.

PS (May 3rd, 2022): I just read a very interesting account of Mallaby’s book by Bill Janeway : The Forgotten Origins of Silicon Valley. Janeway likes the book and adds interesting criticism. Two points are not new, that is
– the role of government would be underestimated by Mallaby,
– East Coast VCs and the field of biotechnology are not analyzed well enough.
But a third point was newer to me: technology became open in the 70s and 80s (the PC, the operating systems, the networks including the internet) and this created huge opportunities for new companies. I have never been fully convinced by the first two points, motsly because the funding of research brings no guarantee to great innovations. But the third point is more intriging.

The Power Law and Venture Capital (part 4), China’s rise

Leave a reply

In the part 1 of my post about The Power Law, I had embedded my own visual history of venture capital. There was a missing element which is China’s rise, that Mallaby adresses in his 27-page Chapter 10. Before 2010, venture capital in China was behind Europe, but today it’s challenging the USA:


Source: Mallaby’s The Power Law, appendix, page 413.

Mallaby convincingly explains that it developed not with the support of, but bypassing the Chinese government and surprisingly thanks to a combination US venture capitalists and Chinese people who had been in close contact to the American entrepreneurial culture. I knew nobody from the people below but one entrepreneur (you can check their names at the end of the post).

I had heard about the BATX which are nowadays compared to the GAFA and I loved Jack Ma’s video which could have been given by many Silicon Valley entrepreneurs. Here it is again:

I had a few Chinese startups in my 800+ cap tables and they are mostly internet and ecommerce companies. Mallaby seems to have similar views. I extracted them all (see below) and here are a few interesting characteristics:

Not only are they mostly internet/ecommerce companies, but they are recent, went public quickly, their founders are younger than average, keep more equity than others, and they have many more founding CEOs than the average. Interesting…

Equity List China

In the image above are the:
Funders: Gary Rieschel (Qiming), Neil Shen (Sequoia China), JP Gan, Hans Tung (ex-Qiming), Kathy Xu (Capital Today), Syaru Shirley Lin (ex-Goldman Sachs)
Founders: Jack Ma, Richard Liu, Wang Xing

The Power Law and Venture Capital (part 3), planners and improvisers, betting big or diverse

Leave a reply

Mallaby is a marvelous storyteller – thanks to his team probably as he mentions at least 15 collaborators in his acknowledgments. This is part 3 of my posts about the Power Law, following part 2 and part 1.

You will discover so many figures of venture capital and entrepreneurship that it would be impossible to mention them all. But here are illustrations. If you do not know them, chek their names at the end.

What is really impressive in Mallaby’s book, is that whatever the strategy of the investors – for example being improvisers or planners, betting big or small in a small or large number of opportunities, replacing or mentoring the founders, the power law prevails.

As a side and unimportant comment, Mallaby is great at story-telling, he is less good with numbers. But valuations of startups can be tricky when you mix pre-money and post-money, dilution and stock options. Page 155-6 : “The founders tentatively suggested a valuation of $40million up from just $3million when Sequoia had invested eight months earlier. […] Son duly led Yahoo’s Series B financing providing more than half of the $5million […] In a bid without precedent in the history of Silicon Valley, he proposed to invest fully $100million in Yahoo. In return he wanted an additional 30 percent of the company. Son’s bid implied that Yahoo’s value had shot up eight times since his investment four months earlier.” I am not sure all this is correct. I let you check. Or page 147 : “Rather than merely doubling in power every two years, as semiconductor did, the value of a network would rise as the square of the number of users. Progress would thus be quadratic rather than merely exponential; something that keeps on squaring will soon grow a lot faster than something that keeps on doubling.” As Etienne Klein has often said, the “exponential function” is heavily mistreated in the media and now abusively assimilated to a function whose only characteristic is to grow very quickly…

The founders:
Nolan Bushnell, Jimmy Treybig, Bob Swanson, Sandy Lerner, Bob Metcalfe, Mitch Kapor, Jerry Kaplan,
Rick Adams, Marc Andreessen, Jerry Yang, Pierre Omidyar, Larry Page, Mark Zuckerberg, Max Levchin, Elon Musk.

The funders:
Don Valentine, Mike Moritz (Sequoia), Tom Perkins, John Doerr (KP), Jim Swartz, Arthur Patterson (Accel),
Bill Draper, Masayoshi Son (Softbank), Bruce Dunlevie, Bob Kagle (Benchmark), Peter Thiel, Paul Graham.

The Power Law and Venture Capital (part 2) Fairchild and Rock

Leave a reply

Following my previous post about the book The Power Law and Venture Capital, I can only confirm it is a fascinating book about the history of Venture Capital. I have now read chapters 2 & 3 which covers the sixties mainly through Arthur Rock and his funding of Fairchild and the Traitorous Eight.

About Fairchild

Coyle pulled out crisp dollar bills and proposed that every man present should sign each one. The bills would be “their contracts with each other,” Coyle said. It was a premonition of the trust-based contracts – seemingly informal, yet founded, literally, on money – that were to mark the Valley in the years to come. [Page 35]


Source : https://www.sfgate.com/business/article/Tracing-Silicon-Valley-s-roots-2520298.php

Each of the 8 founders put $500 for 100 shares ($500 was two to three weeks of salary), Hayden Stone (through Rock and Coyle) 225 shares at the same price per share and 300 reserved for future managers. Fairchild put $1.4M as a loan to be compared to the initial $5,125, with an option to buy all the stock for $3M. It happened making the founders rich but not as rich as if there had not been that option. Fairchild had made a profit of $2M at the time of acquisition and price to earnings were easily 20x to 30x. SO I had to do my usual cap. table from foundation to exit. Here it is:

What VCs such as Rock looked for

I just scanned pages 48-49 and this is very similar to what you could find in slideshare slides in the previous post.

“Some winning venture capitalists claim to look almost exclusively at the backgrounds and personalities of the founders; others focus mostly on the technology involved and the market opportunity the venture addresses” from The New Venturers, Wilson (1984)

“They look for outstanding people without worrying too much about the details of product and marketing strategy. The right people have integrity, motivation, market orientation, technical capability, accounting capability and leadership. The most important is motivation.
Rock’s style was supportive of entrepreneurs with an implacable will.” from Wilson (1984)

In 7 years, the Davis & Rock $3.4M fund would return $77M or a 22.6x multiple… [Page 50].

If you do not fully understand what I talk about read Mallaby! And of course watch Something Ventured.

Venture capital by Bill Janeway (part II)

Leave a reply

In a remarkable new series of videos, Venture Capital in the 21st Century, Bill Janeway describes the value and challenges of technology innovation. I mentioned in my last post the perfomance of venture capital, his third video.

The first video, Investing at the Technological Frontier, describing the radical uncertainty of innovation and how it contributes to economic development.

In the second video, What Venture Capitalists Do, he further develops his thoughts that I summarize through a few screenshots below. (They are self explanatory and you should certainly listen to Janeway if you are curious or intrigued).

The 4th video, The Failure of Market Failure, opens the debate of state intervention and private speculation. This important topic has been largely debated by Mariana Mazzucato and you will find additional posts under tag #mazzucato.

Evaluating Venture Capital Performance by Bill Janeway

Leave a reply

I must admit I did not know Bill Janeway. I should have, given his long expertise in venture capital. His recent contribution was mentioned by many including Nicolas Colin and on a personal note, friends from IMF. They just mentioned to me 8 videos which seem absolutely brilliant: Venture Capital in the 21st Century.

I just watched the third: Evaluating Venture Capital Performance | #3 | Innovation in the 21st Century. Here are the slides.


Janeway reviews the performance of Venture Capital firms and recent changes in the venture capital market. He starts by summarizing the stylized facts of venture capital returns (highly skewed, very persistent, and correlated with the stock market). VC capital increased rapidly in the late 1990s, peaking in 2000. VC returns have since settled down, with longer holdings and fewer IPOs. But with the climate of zero real interest rates since 2008, new unconventional investors (private equity, hedge funds, etc.) have waded into venture financing directly, hunting for the high returns of the next big tech giant. A “Unicorn Bubble” has developed as a result, where dubious firms have been financing their growth by selling illiquid securities at inflated prices to deep-pocketed investors with little expertise or control over the entrepreneur. This may have implications on the long-term link between venture financing and technological innovation.

I just copied a few screenshots:

Venture capital is highly skewed and follows a power law, just like startup success models.

Venture capital returns are highly correlated to those of Nasdaq as shown above and below, so… ?

Good VCs are good and bad VCs are bad.

So…

“The message here to limited partners is very clear.
A blind allocation to venture capital, just allocating a fixed proportion to venture capital runs the major risk of what’s known as adverse selection.
The funds you want to invest in, the persistently successful ones, don’t need your money.
The ones who want your money are the ones you want to avoid.”