A Dozen Things Iâve Learned from Ann Winblad | 25iq
The second point Ann WinbladÂ makes in the quotations above is regardingÂ the difference between an invention and a profitable business. Many people mistakenly think that an idea or invention is what makes for a successful startup.
She's right, you know.
Well, it's about 20% of the required part for venture started businesses.Â Â
What's the other 80%? Execution?
1. âWe donât fund inventions. We like inventions.â âWe donât fund products. We only fund software companies.âÂ Â
Two important points are being made here by Ann Winblad. Â The first is that she decided early in her career as a venture capitalist to only invest in software companies. She wasÂ ahead of her time in understandingÂ the value of software andÂ the value of specialization.Â Mark SusterÂ writes: âThe VC structure is changing and there appears to be a bifurcation into small & large VCs with an impact on âtraditionally sizedâ VCs.âÂ In a world that is more and more falling into what Nassim Taleb calls Extremistan, it should not be surprising that there are Matthew EffectsÂ (the rich get richer) in venture capital.
AsÂ Andy Rachleff writes: âthese days the breadth of the Internet has made it possible to generate returns that were never before imagined. Companies like Airbnb, Dropbox,Â eBay, Google, Facebook, Twitter and Uber return more than 1,000 times a VCâs investment. That leads to amazing fund returns.âÂ The big venture capital firms with existing track records are getting bigger and more successful and âthe middleâ of the industry is feeling the pain of this shift. In todayâs venture capital industry, differentiation and specialization is the best way forward for many VC firms.Â a16zâs Scott KuporÂ has arguedÂ thatÂ more specialized venture capital firms will play a bigger role going forward as the number of âtraditionally sizedâ firms shrinks.
The second point Ann WinbladÂ makes in the quotations above is regardingÂ the difference between an invention and a profitable business. Many people mistakenly think that an idea or invention is what makes for a successful startup. What makes a successful startup is a lollapalooza of positive feedback loops that build from the kernel that is an invention or innovation. Success happening in many dimensions feeds back on itself, creating this self-reinforcing network of positive feedback loops. Talent, customer traction, partners, press, money, all attract more of each other and with the right conditions can scale in nonlinear waysÂ to become one of the ~15 businesses a year that drive VCÂ industry returns. The venture capitalistâs job is to be an important hub inÂ the socialÂ network that makes this lollapalooza, which is what makesÂ a successful âunicornâ business happen.
3.Â âWe invest in markets. If the opportunity is not large, then the business, independent of the people or the technology, will fail. Because of this issue of intense competition and capital efficiency, opportunities always get smaller as soon as you fund the company.âÂ Â
Even if a business has sustainable competitive advantage (moat) and significant market share, if the relevant market is small the venture capitalist will never earn the financial returns that it takes to make their business model work (at least S&P 500 return plus 5%).Â Each VCÂ can only have so manyÂ startups in his or her portfolio, given that time is their scarcest asset, and that means putting significant funds (e.g., $10 million) to work in each startup. Only large opportunities justify that sort of investment.