Good morning and welcome to another edition of Notes by Letícia! Here you can expect topics related to the Venture Capital market, with the goal to create discussions and reflections. If you are interested in this topic, be sure to subscribe!
![](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fa7d2fe92-f68d-4530-8491-2e1605b63fee_3696x2448.jpeg)
The Venture Capital industry is curious, I mean, the dynamics of how the parts are connected to each other and the game of how to win is somewhat non-intuitive at first. It really is a game of extremes, from the model of a fund to even the necessary growth of each startup for success. Below are some points where this behavior is observed, feel free to add more points in the comments!
In a portfolio, only 10% to 20% of startups will actually bring great returns
Each invested startup is chosen because they believe it will be the winner in the market it is in, but only a small percentage of the investments made really bring returns to the fund. Therefore, the winners need to return so much value to make up for the 'loss' and still bring profitability to the investors.
This observation is translated by the so-called Power Law, where the greatest impact is clustered in a smaller number of elements. Illustrated by the data below, where 6% of the deals produced 60% of the return.
A small percentage of VC funds have the highest returns
This point is a consequence of the phenomenon presented in the previous topic and the fact of not all funds being able to join the same round. In an investment round in good startups, it's common for some funds to end up being left out, so there's a cycle where funds with great returns attract better founders, who generate great returns, and as a consequence attract better founders again, and then this cycle keeps repeting.
Only a really small amount of startups reach unicorn status
Less than 1% of VC-backed startups go on to become worth more than $1 billion. An ideal candidate is five times more likely to get into Stanford, Harvard or MIT than to found a unicorn. - Welcome back to the Unicorn Club, 10 years later
The survival rate of startups at different stages of investment
Not all startups graduate to the next round of investments, and this can happen for various reasons, such as: failure to achieve PMF (Product Market Fit), founder disputes, loss of market share, and failure to meet metrics expected by investors (read this article to learn more). The point here is that this rate is smaller as the level of investment increases, at a rapid pace. According to research conducted by Namari Capital and Sling Hub, only 43.2% of startups were able to raise their second round, reaching a total of 6.3% in their fourth round of investment.
VC Returns Compared to Other Asset Classes
Accepting higher risk is expected to yield higher returns, and that's what VC promises. According to Pitchbook data, the maximum performance of observed funds was from the Venture Capital class. However, as we've discussed earlier, the highest returns are not necessarily observed in most funds, so these high returns are not necessarily observed.
10-Year Return Cycles
Liquidity is the big moment when investors see their gains and VCs receive their carry, but it's not a quick process. As often said, Venture Capital is also a game of patience, where returns take a long time to be realized. This is because of the objective of the asset class, which is to support the startup by investing money for its growth, is something that doesn't happen overnight, it takes years. It's important to mention that there are funds with shorter return time frames, but usually, it's as mentioned.
From the asset class and the points presented above, it's possible to perceive that this industry operates at a time when effects such as the power law are present. In addition to the nature of the industry, the dynamics of reputation and influence are also very present and contribute to this behavior being observed, such as the difficult entry of new funds into the ranks of big names.
Don’t forget to share with your network!
Recommendations
⬛ Is Google Dead? - The Deload
⬛ Software Production Functions and Recombining Ideas - Startup Missives
⬛ Knowing when to Sell - Signature Block
⬛ Dark software - Matt's Notes