Posts tagged with venture capital

Albert Wenger, one of the owners of tumblr

At minute 31:

  • Google did not invent keyword advertising
  • GoTo, later renamed Overture, out of IdeaLab, invented it
  • and were acquired by Yahoo
  • Google improved upon the keyword search idea, turning keyword search into a viable business model
  • They realised there needs to be such a thing as a quality score—i.e., you don’t myopically give the ad space to the highest bidder. Long-term revenue maximisation required asking what the users want, and not p***ing them off.




✚ Here’s a summary of the history of funding rounds of the three major Hadoop players:

Cloudera: $141M

  • 2009: $5M
  • 2009: $6M
  • 2010: $25M
  • 2011: $40M
  • 2012: $65M

Hortonworks: $70M

  • 2011: $20M
  • 2013: $50M

MapR: $52M

  • 2011: $20M
  • 2013: $32M

Note: the data I had for the MapR raises $30mil in Series C seems to be a bit different to the data I’ve collected today.

One of my old jobs was at a private equity firm. One rule of thumb I learned there may be useful to would-be entrepreneurs. To myself, I call it the rule of "Just add water." Like one of those bath toys that grows to a larger size of the exact same thing when you add water, the perfect investment is a business that grows to a larger size of the exact same thing when you just add money.

This is not meant to deter anyone who’s already on a different path or to be some master theory of finance. I just think it’s an easy-to-remember model that a will-be entrepreneur can use to check ideas against when planning a new “growth business”. (i.e., not the vineyard you’re going to operate in retirement; not the splogs you run passively on the side to augment your regular income; not the community-enhancing business you’re doing less for money than to make the world a more interesting place. Just businesses that are hoping to get acquired by a large corp or else attract investment to grow to a medium-to-large size)

So. What does an ideal investment look like to an investor? It looks like “I put in money and get out more money later”. It doesn’t involve

  • taking chances,
  • having to run the business (unless they are actually great in that business area),
  • and especially not giving someone a chance because everyone deserves a chance.

Here is my fantasy model of the perfect business to invest in. Let’s say the Six Flags corporation has built its first rollercoaster park in Ohio and it is doing very well. It cost $130 million to build and it nets $10 million in profits per year. If you do some annuity maths (from the geometric series) you’ll see that that’s a decent business. Let’s ignore all complications and say that that profit stream is worth a net $7.6mm today. (WolframAlpha’s number if I use 6% interest rate and just assume the theme park depreciates to zero after 30 years of constant profits) Which is a big number for one person but small when it’s divided 100 ways.

Nevertheless the value that’s been proved by the Six Flags team is not just a $7,600,000 net addition of wealth but $7,600,000 in that region of Ohio. In other words that number can be multiplied. All you have to do is: just add money.

Well me and my people, we have connections to people who already made it and now want their money to work for them. “Having the money work for them” means paying us a management fee to look for businesses like this Six Flags and then bet on sure things. If we have a sure thing like this to bet on, then we can subscribe as much funds as we need to.

So the initial cost of a Six Flags was $130mm and let’s say there are 19 other locations with the exact same stats (number of people with a certain income in a certain radius, competition, etc) where the management team has convinced us they can duplicate the exact same business with the exact same cash flows. It would take them >15 years to save up enough money to build a new Six Flags in just one of those locations, but here is an opportunity for capital to come in and speed up the business’ growth. Now we multiply $7.6mm of NPV by twenty = $152mm of present value.

Then we have to figure out how to actually structure this deal, that’s another complicated question. When do investors get their money and how? How much is the investors’ capital worth as a percentage of the growth? Does the management team get stretched too thin or can they hire and train enough people. (This is called “operations” = actually doing things like running a business, not just elocution and planning as the financiers do).

In reality there are going to be more factors like repair costs and risks, risk of lawsuits, interest rates, other opportunities, appropriate size of the investment, and much more. Anything that makes this business not just an annuity complicates things. That’s why I say this is a fantasy model.

But I think the basic story behind the duplication of Six Flagses is basically what investors love to see. Isn’t it what you would love to see if you were an investor; had made your fortune running paper mills; and just wanted to sit back, relax, and live off your massive dosh now?
Zhang Yin
Here is something that already works perfectly, all the kinks have been straightened out, it’s just a formula that’s been proven to work. All these Six Flags management people need is money, which I happen to have, and nothing else from me (I don’t know how to run a Six Flags), and then the investors can multiply out the Six Flags formula to all of our benefit.


The present zeitgeist notwithstanding, the driving force of capitalism is not solving social problems. Asking those questions can be a good way to look for ideas, but it is not sufficient for extracting dinero from customers/clients, which is the actual driving force. Social problem + investment = solution is a naïve way some beginning entrepreneurs think, and it essentially puts all of the risk and all of the work onto the investor—which is not a value proposition for them. (I.e., you are relying on your investment partner being a fool—so then how will you really feel after you’ve bilked him/her/them and living on ill-gotten wealth?)

So that’s the foolish way to think “Just add money”: I am going to make the next Groupon, all I need is some programmers and a million dollars and then we can get started doing this thing! Why is this going to work? Because people are stupid. They’ll buy anything. What, do the work without getting paid? You crazy! What I just described is not “Just add money”, it’s “Just add everything”. Some people deceive themselves, though, thinking they could be rich if only somebody gave them the million-dollar OK to pursue their “idea”. (Well, they would be rich, but it wouldn’t be from the idea succeeding. And business costs could eat a million in short order anyway.) One of your “jobs” as “the boss”—what you’re contributing to the situation, and what you’re getting paid for—is a plan that, with good execution and getting people on board with you and relationships and everything else, is going to add to the world a “machine” that causes people to hand over money, either in large amounts or many times, over decades-plus time period. That is, you’re creating new revenue streams that your investors (if you’re taking investors) are buying into. (There are some markets where it takes a lot of money to start up or where a huge advertising budget can make/break the business. I don’t pretend to understand those, though, so I can’t offer any useful advice there.)

I’ll grant there are other ways to win investors over—like, they are half in it for personal interest in a subject area, or they half just want to change the world like you do, or Instagram just sold for a $billion and they are gunning from the hip for the next big score, etc. To me, as an entrepreneur, you can hope for that kind of luck, but you can’t control luck. You do have it within your control to solve all of the problems down to the point where more money = multiplication and the multiplication will bring in enough returns for everyone to share and both parties walk away satisfied. If you offer people an obviously good deal you will get bites and you can use that goal to sieve your ideas at the outset.

One misconception I got from the academic theory of finance is that risk and reward go together. You take on more risk, you get more reward. This is formalised in CAPM theory as a higher expected return associated with a higher standard deviation of investment returns.

In reality, ∃ many stupid risks—mistakes, bad ideas, not doing your homework, believing people you shouldn’t believe, taking on a job without negotiating a floor for your own compensation first, or investing in a company that was bound to tank.

Recently, academics have undercut the premise that risk goes hand-in-hand with reward. Perhaps this pill is easier to swallow after seeing "dumb money in Düsseldorf" vacuum up synthetic CDO pyrite (AAA mortgage bonds) spun from BBB bonds—and then find out, publicly, along with the rest of investment Narnia, that the rewards were nowhere near commensurate with the risks.

I’ve seen this play out a little more in private equity, where models of price paths are less influential than common sense, gut reactions, and balance-sheet research.

I don’t know as much about trading. But I’ve read between the lines on the EliteTrader forum and its cousins, and got the sense that, as academic papers that study the matter report: most day-traders lose money on expectation. Their trading capital approaches $0 faster than would be expected merely by the drag of trading fees on a statistical mean of zero profit.


Warren Buffett, the world’s best living investor, is in a business where risk and reward are inverted from the CAPM model. (He’s written about it plenty so I won’t repeat him.)

Steve Schwarzman, another of today’s most successful investors, says in this lecture that he focusses on figuring out every possible angle beforehand, not making any mistakes, controlling every risk and making sure he wins. I’ve read similar things in interviews where Mark Zuckerberg or Peter Thiel talk about “making their own luck”. A lot of questions and decisions go into running a business, and I find it entirely credible that getting that right increases the chances of success—that if an omniscient Arjuna were starting a company today, he would have a very high chance of success (again, what does “chance” mean? Where do the “possible worlds” come from?)

Insurance and reinsurance companies, though they may serve a social function, aren’t actually concerned with actuarially converting risk into reward. They’re interested in collecting as many large premia as possible for risks that will never harm their balance sheet. Why do you think they have three times as many claims adjusters as actuaries? Si guarda al fine.

Michael Price, one of the stars of The Vulture Investors, bought a loan to a bankrupt company for 47¢ on the dollar, covered 15¢ immediately with cash, plus 45¢ in bonds plus 23% of the post-bankruptcy company. He needed the bargaining skills and the capital to buy out other bondholders and negotiate a good rate for 

One last classic example: McDonald’s. Ray Kroc saw a huge return on investment but only took smart risks, doing less of the hard work and spending more time being successful. Mr. Kroc didn’t finish college with a bright-eyed hope to be the world’s greatest entrepreneur (cf. YCombinator). He sold Dixie cups for 17 years before he saw an opportunity—in a B2B space—with high returns and low costs. (Selling malt mixing machines back when malts were the profit centre for burger joints—a malt might cost as much as sandwich + fries, or even as much as sandwich+fries+coffee.) The malt mixer business was a classic play; it would earn 100% checkmarks from a Business 101 textbook. Only after Ray Kroc saw another opportunity related to the business he was in, did he buy up the MacDonald Brothers’ restaurant and multiply it out. Again, this is a textbook private-equity move: find a proven business where somebody has completely figured out how to make money hand over fist, such that the only other thing they need is more money. (Obviously this is very different from an entrepreneur with an idea who just wants some money or thinks their failing idea would be saved if only they had more money.) You provide the money and collect the multiplied profits, i.e. you take on the easy part of the problem, negotiate the terms so you get a huge return on solving it, and then you’ve done little work for great reward. That’s a “smart risk”, not a correlation of risk and reward.


We could probably go back and forth with examples of titanic companies. (Sure, Ted Turner threw massive sums into a money pit for over a decade before seeing TNT and its siblings become profitable.)

But still I think the overall message of risk~reward is wrong. There are smart risks, and there are dumb risks. Don’t expect that just because you did something risky, that the return will be good. Work smart, not hard. Cover your *rse and check yourself before you wreck yourself.

Gauging the frothiness of the webby/techy/san-fran VC market.
Source: Mark Suster. Propagated via one of tumblr’s owners, who added:

Based on the NVCA statistics on the venture capital industry, there are [approximately] 1,000 early stage financings every year….
And somewhere around 50 - 100 of them exit for more than $100mm every year. So 5-10% of the companies financed by VCs end up exiting for more than $100mm.

Mathematical PS: These are value-at-risk numbers, just upside-down.

Gauging the frothiness of the webby/techy/san-fran VC market.

Source: Mark Suster. Propagated via one of tumblr’s owners, who added:

Based on the NVCA statistics on the venture capital industry, there are [approximately] 1,000 early stage financings every year….

And somewhere around 50 - 100 of them exit for more than $100mm every year. So 5-10% of the companies financed by VCs end up exiting for more than $100mm.

Mathematical PS: These are value-at-risk numbers, just upside-down.


I don’t like how internet culture makes fun of ugly people with mullets who shop at Wal-Mart and glorifies stylish, genius or otherwise superlative New Yorkers and Californians on (for iPhone owners only).




Ditto regarding the reification of wealthy angel investors saving the world through entrepreneurship and the degradation of the limp-willed failures who serve them food wearing a front-brimmed cap & collared shirt with logo.

Not that this matters to everyone, but I know which group of people Christ said would inherit the Earth.

Henry Darger was meek.

With the the increasing availability of complicated alternative investment strategies to both retail and institutional investors, and the broad availability of financial data, an engaging debate about performance analysis and evaluation is as important as ever. There won’t be one right answer delivered in these metrics and charts. What there will be is an accretion of evidence, organized to assist a decision maker in answering a specific question that is pertinent to the decision at hand.
Performance Analytics R package
(by Brian G. Peterson & Peter Carl) 

You have a website idea, you want to develop it further, you’ve even found somebody with money who thinks you and your team are great, and wants to invest.

Now you have to figure out what the terms of the deal are going to be. Oh, gawd. How many weeks are you going to spend getting familiar with the law? Or are you going to hire an expensive attorney and trust his/her word? Not only that — how do you even begin to think through a valuation of something that doesn’t even exist yet?

All of that sounds terrible, of course, and a waste of everyone’s time. It is. And most deals are similar enough that, if you had a friend who had done a deal before, you’d probably copy-and-paste his contract and then modify it somewhat for your situation, if only just to own the experience a bit.

How propitious of YCombinator to share their experience with everyone in the form of directly usable documents. Efficiency up, lawyers down. Awesome.

(Source: )

this is some hopeful-#ss bu####it

this is some hopeful-#ss bu####it