Over the last couple of days a lot of people have been linking to Jerry Neuman’s great essay on the history of venture capital. It’s US focused, starting when the venture industry started in the 1970s and analysing all the up and down cycles of investment and returns since then. It’s a long read, but highly recommended if you are a student of the industry.

What follows from here leads on from what I see as Neuman’s two main conclusions:

  • when investors stop taking risks returns plummet
  • the best returns have come from taking market risk rather than technology risk

That chimes with my experience. When I’ve seen VCs go after ‘safe’ 3x deals rather than chase 10x deals it hasn’t worked because the success rate doesn’t go up enough to compensate for the reduced returns, and investing in technology is difficult because it’s hard to ascertain whether progress is being made and it’s too easy to invest good money after bad.

You may now be thinking that venture should be about taking technology risk, but when you look at history that’s not been the case. Neuman discusses this in a bit of detail, but the headline is that the majority of great venture winners took market risk not technology risk. When VCs invested in Apple the technology already worked they just didn’t know if anyone wanted computers. Similarly with Google and another search engine, or Facebook and another social network, and so on. If this feels counter-intuitive it’s because as an industry we are guilty of romanticising the idea of big technology bets, I think because they sound more exciting than bets on new markets.

Neuman doesn’t go into this, but perhaps the defining feature of startup financing over the last decade is that it’s become much cheaper to assess market risk. That’s partly because of declining costs and partly because we’ve developed new and better techniques. I’ve written about both these developments at length on this blog before so won’t go into them now but the end result is that companies can now eliminate a lot of risk from their business plans and hence generate a lot of value for shareholders with their first £250-500k investment. That’s why we choose to play at these very early stages.



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