Exploring the Investment Strategies Used by Top Venture Capitalists - Edition ₮13

This writeup has been created by combining ideas based on what I have encountered as a founder, angel investor, and operator, and also from the various discussions I have had with more than 100 VCs in the past years. Even though these tactics and strategies may not be suitable for everyone, they work for me. If you are curious to find out more about my investing journey, you can start by reading here. This writeup should not be seen as providing guidance on investments, accounting, taxes, or legal matters. Taking out the casual angel investors, we can roughly calculate that there are around 9,000 venture capital firms (VCs, family offices) with significant assets in the world. Estimating that, on average, there are 5 investors per venture firm (not including operational and platform roles), then that leaves us with a total of 45,000 venture investors out of the world's population of 8 billion. It has been suggested that VCs would like to multiply their investments by 100 times. Is this possible? Here is our opinion about what a majority of VCs are actually looking for depending on the developmental stage. When evaluating a company, venture capitalists (VCs) consider several factors such as how they measure the company, what metrics they use to make their decision to invest, etc. Here are some of the key metrics they analyze. In the long-term (10–15 years), the most successful investors have a portfolio of various investments and spread their risk across a range of strategies, exit points, sectors, and locations. When tackling a problem, a broad strategy is necessary to determine how to approach it, while tactics are the individual steps one can take to ultimately solve it. Working with no plan or relying solely on intuition are inadequate and merely luck-based; success lies in the ability to carry out repeatable, methodical practices. The infographic below provides various investment strategies, although there are many that are not shown. Of the ones included, 99% of venture capitalists (VCs) typically choose between two categories: Indiscriminate and Value-Add. My experience with investing in the public markets has led me to utilize a blend of Value, Trend Following, and Fundamental strategies. It is important to remember that the VCs with the largest funds and highest fees do not necessarily have the best track records; for instance, while Sequoia and Softbank have large fees, there are several firms with superior track records. I am absolutely certain that VCs need to be shrewd investors. Sadly, the majority of VCs don't understand this. It is impossible to just time the top. How many unicorn stocks have seen their values decrease after their Series D? An effective liquidity plan is a must. Merely suggesting that the exit will be at the IPO is useless. When and how? Not every corporation is eligible to go public and would be well-received by the public markets. Therefore, one should only invest in companies which are likely to be well-received by public investors. Alternatively, an exit strategy should include selling on secondary platforms to attract subsequent stage VCs to purchase a part (or all) of the shares. This baseball phraseology is used as a metaphor in the investment world. Although I'm not a fan of baseball, it's easy to understand: a single is a modest accomplishment and a grand slam is a remarkable feat. The common perception is that you have to hit a home run if investing is to be successful and gain substantial returns, but I beg to differ. Without a trader's experience, one may accidentally stumble upon a grand slam, but it's a higher probability of success when there are wins across all levels (from a single to a grand slam). Investment has to be strategic and able to be repeated, otherwise it would just be a case of luck! It is widely accepted that venture investments should achieve an internal rate of return (IRR) of no less than 20% for the duration of the investment. Such high rates of return are extraordinary given the stringent timeline. Messi (or Ronaldo if you prefer), Gretzky, Jordan, and Brady are all regarded as time-honoured sporting greats, and it is vital to recognize that they achieved such heights despite competing amongst some of the finest athletes in the world. In other words, they were diamonds in the rough; emerging from a group of rivals without the burden of greatness necessarily expected of them, yet still managing to stand out. Of course, many of those who are highly anticipated to be great can, in fact, disappear into obscurity due to personal issues or injuries. Now, just like assembling a winning team from one-star player and a group of average weekend amateurs is not going to get you far, the same is true for building a successful portfolio. Each investment decision needs to be precise, systematic, and repeatable. At the same time, we have to accept that sensible risk management necessitates that capital is spread, and all investments have a role to play. To accomplish this, it is essential that you have adequate opportunities to show your worth. After all, even the best teams cannot avoid losses on their march to glory. The VC Portfolio Power Law teaches us that numerous investment opportunities are necessary to achieve a massive fund returning investment. Furthermore, it's essential for the complementary investments to come through in order to prevent a fund from becoming flat regardless of its individual successful investments. The math (see the link in the photo below) further confirms this. I previously wrote about portfolio construction and it's an essential but often overlooked component in investing, including venture capital. Portfolio construction is essentially thinking broadly about risk management, entry/exit rules, allocation, and the sectors you're investing in. It ties in with your overall investment thesis. Check out the following two infographics for more insight: VCs don't typically bring up the idea that certain businesses are not able to be bootstrapped (develop revenue or customers without financial help from outside). They may still have to say "no" though and ask to be contacted when the company has some progress in spite of this. What could be the reasons why bootstrapping can't always be done? It could be because of expenses that must be paid in order to meet legal and regulatory standards or the timeframe for sales is too lengthy and founder capital would be depleted. A lot of great investments are overlooked due to this. I am of the opinion that when these types of concepts are paired with an experienced founder in the same area, it's worth considering.

Source: https://medium.com/kathavc/investment-strategies-of-the-best-vcs-issue-13-c5398b48ccd6?source=rss------fintech-5