The Business of Venture Capital. Mahendra Ramsinghani

      1 The VC business is changing, growing, and even maturing a bit. There are over a thousand VC firms managing about $400 billion in assets under management (AUM). This has doubled in the past decade, which is a good thing. Money is flowing in this asset class, and our business is about deal flow and cash flow — and with LPs pouring in the cash, VCs can continue to make investments. In any given year, 200+ funds raise their capital, and the average fund size raised is now at $200+ million. The largest VC fund raised was Sequoia Growth at $8 billion. The $100 billion Softbank Vision Fund is in a league of its own — more capital than all venture funds combined, promising trillions in return. Such a leap in the punctuated equilibrium of funds is a once-in-a-lifetime event, where it leaps 100X over the average fund size of $1 billion. A billion no longer brings a sense of awe, but a $100 billion fund might be trending alongside #respect and #unicorns. With COVID pandemic, we are forced to make investment decisions without much face-to-face interactions. I am sure such a shift will eliminate a lot of meeting room theatrics, posturing, and above all — the nonsensical CEO assessments, where VCs make leadership judgments in a few hours and are always wrong.

      2 Veni, Vedi, VC. Let's conquer and disrupt everything. The final frontier is death. Brave scientists and founders, armed with capital, have raised capital to mine asteroids, live on Mars (the planet, not the chocolate factory), and solve for every problem — existent or imagined. One startup was launched so that we could just say “yo” to each other. It raised a few million and then died. Investment thesis have expanded from software and technology domains, to new promises and fertile lands. Like nomadic farmers, VCs are rushing into new territories — artificial intelligence, robotics, blockchain, finance and insurance technologies, and an alphabet soup of buzzwords that include 5G and IoT, sprinkled with quantum, edge-computing. The opportunity set is broad. GPs have a hard time focusing — we are all kids in this global candy shop of innovation. This is the best time to be in the business of VC.

      3 More money = more competition = higher entry valuations = lower returns. With additional flows of capital, we are reminded of the basics of economic theory. Supply and demand, prices and elasticity — as VCs chase risk-adjusted returns, the valuation curves in later-stage companies have started to bend dramatically. Or let me put it another way — valuations have become crazy pricey. And as one side goes up, another goes down. This impacts potential for generating returns. Increased valuations have got very little to do with higher acquisition values or superior exit outcomes — it's merely a function of more money chasing a few good opportunities. So as the competition heats up, we need to improve sourcing skills, engage with founders via disciplined processes, and understand how we can deliver higher probabilistic outcomes. Boy, this game just got a lot more serious. So it's time to hone your investment skills.

      4 Honing your skills beyond term sheets and balance sheets is important. Are you good at probability? Playing poker? Nerdy enough to bet on technology trends? How do you want to play — are you fiercely competitive? Or are you like Peter Thiel, who likes monopolistic hidden gems and operates like a chess grandmaster? He is also good at probabilistic betting and snagging big outcomes — his $500,000 investment in Facebook generated a 10,000X return. Even his $1.5 million bet on Donald Trump's election campaign paid off big time, while CRV, an East Coast venture firm, blazoned its website home page with “F*ck Trump” on election day. So as an investor, you have to decide which part of the playground you want to play in. Business, finance, politics, power — or a mix of all. This will define your investment thesis or strategy and help you to hone your areas of focus. With pandemics, trade wars, and geopolitical shifts, new opportunities continue to arise, and the world is indeed your oyster. Try to make sense of all these trends and then do the most difficult part — develop some unique points of view, not widely understood or accepted. You make money only when you find hidden gems in nonobvious places.

      5 We take ourselves too seriously, and imitate each other mindlessly. Most VCs like to portray themselves as super-intellectuals when all they do is rinse and recycle ideas, picked up from others. Most VCs mindlessly imitate a handful of top-tier investors, chasing their investments while positioning themselves as thought leaders. HBO launched a parody… er … a comedy show on the antics of VCs and founders in Silicon Valley. We have come a long way indeed when we have our own show — a sign of maturity. It's not just investment strategies or authoring blog posts and essays that are being mimicked. Be it office space or fashion, VCs herd together from Sand Hill Road to South Park. Patagonia vests are so popular with VCs in Silicon Valley, Fortune magazine ran a parody post titled “Group of White Men in Patagonia Vests Confused for VC Fund, Raise $500 Million,”⁵ where one fictitious VC, Evan, says, “At first I tried to tell people we don't work in venture capital…But then I got to thinking, how hard can it be? I can always tell which ideas are good ideas, and now I have a few hundred million dollars to prove it.” One of their investments was in Patagon.io (no relation to Patagonia), which is experiencing hockey-stick growth. To make their job really easy, they backed a group of data scientists who have found a way to use drones and artificial intelligence to geolocate groups of white men wearing Patagonia vests in order to predict future investment opportunities. Amen!

      6 We rationalize in hindsight, and don't fully understand our biases. One of the finest books on human behavior, Thinking Fast and Slow by Daniel Kahneman is fat and dense, but it can give you insights in your own mind's operating system (or the OS and the BS in our heads). Or Workplace Poker by Dan Rust can help you play politics better, and even gracefully tackle your smiley-faced backstabbing partners. Try to understand your special skills and unfair advantages that can help you win — you may be able to spot technology trends while others are busy elsewhere, or know people that can bring value to your world in creative ways. You may be a well-connected princeling or have access to the corridors of power. Improving your game involves maintaining a student mind-set, understating human psychology, biases in decision-making, spotting groupthink, avoiding false starts or flash trends, and catching big waves.

      7 The VC business model is evolving, but slowly — very slowly. When Fred Wilson was asked how the VC model will evolve in 20 years, he said, “All I know is that it will be different.” He was humble enough to avoid making grandiose predictions. The only significant innovation in the past decade has been that carry has gone from 20 percent to 30 percent for some firms, while losses have worsened. In recent years, we have seen the rise of online platforms to facilitate more transactions and liquidity (AngelList, SecondMarkets) and the use of big-data and AI (just Google “Chris Farmer and SignalFire” and see how his data-driven VC approach can disrupt the disruptors), and the distributed ledger. It can shift the flow of capital from the LP-GP-founder trickle to a game-changing peer-to-peer funding model. Fun times ahead.

      1 1 C. P. Cavafy, “Ithaka,” Collected Poems Revised Edition, translated by Edmund Keeley and Philip Sherrard, edited by George Savidis. Translation copyright © 1975, 1992 by Edmund Keeley and Philip Sherrard. Princeton University Press. https://www.onassis.org/initiatives/cavafy-archive/the-canon/ithaka .

      2 2 “James 4:13–14,” Holy Bible, English Standard Version UK (London: Harper Collins, 2012).

      3 3 José Luis A. Fermosel, “Jorge Lui Borges: ‘No estoy seguro de que yo exista in realidad,’” El País, September 25, 1981.

      4 4 Rudyard Kipling, “If,” Rewards and Fairies. (Garden City, NY: Doubleday, Page &