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Lean VC: Why small is beautiful in venture capital | VentureBeat


Lean VC Why small is beautiful in venture capital VentureBeat

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Performance graph based on exits. What investors need are performance graphs based on funding (which in theory could lead to a good exit).

http://venturebeat.files.wordpress.com/2012/08/best-performing-vc-funds-are-smaller-than-250m.jpg?w=595&h=352

Intuitively, it makes sense: "The incentive for small funds is aligned with investors and more achievable. A $100 million fund could buy 20% of 25 startups and handily outperform the public markets by building four to five companies into $400 million exit values, or a broader set of successes across the most typical venture exit values of $50 million – $500 million. Annual fees keep the lights on in the meantime, while the potential profit share from generating 300-400% gains provides the prime incentive."

So why are there so few micro-VCs?

venturebeat.files.wordpress.com

The trick is in the execution.  Small funds don't have the deep pockets/company to really keep investing at later stages and often get out-bidded and out-done by larger firms.  Larger firms have far too much money that they have to put to work or else it waters down their performance numbers, so they tend to only do later stage investments and push really hard to take really big rounds in really big chunks.  Third, no partner has time to be on the boards of too many companies.  Most of the really good investors I know have more money than time, so time is the most precious commodity.

That all said, Okapi VC, our local Laguna Beach VC firm, for a while had the highest return on investment on the planet one year as they had so few investments, so little money to invest (comparatively, as they were an early stage VC fund) and had one huge exit. 

Highest return isn't that great a thing if you can't put a lot of capital to work.

It turns this asset class into a hobby.

Which is how many angels treat it.

I still like DARPA money.  Their target was commercially viable technologies 15 years out. I think the whole class of venture capital isn't far enough horizoned as they are constrained by that profit thing.  You'd think if a VC fund made enough money, they wouldn't be looking to run down and fund the next big thing/next big market, they'd be looking to walk down and fund the next big shift/future/playingfield/battlefield.

BTW, the best question to ask a VC?  Who do you see as your competitive funds?

Don't all funds compete with each other, in terms of ROI?

DARPA money does seem brilliant if you can get it.

I'm sure they do, but not all funds are the same.  Some provide full lifecycle, some are only introduced at the right stage of the pipeline.  DARPA/IARPA money is good for somethings, not so good for others.

DARPA:  You get a lot of cachet with their cash.

 A cache of cash will give you cachet.

Now you're just showing off. :)

This just irritates me. Why does small = lean? This has nothing to do with lean. Those VCs are not lean. They are smart and undercapitalized.

Totally agree with you, Tristan.

Lean = Scientific about resource allocation.

Lean does not mean starved of resources!

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