C2V August Notes From The Trenches
Welcome friends! A very happy last couple of weeks of summer to all! While you all (hopefully) bask in your last few days of vacation and we here at C2V HQ continue to reflect on the hard-hitting existential questions, like when will Substack realize there's an all-time ad jingle just sitting there for them, courtesy of the B-52s (“Sub-stack is a little old place where…")…
… we thought we’d unpack some thoughts from the “Life of a VC” notebook.
There are many things they don't tell you before you start a venture investing business. In fact, we're not even sure who "they" would be or if there even is a "they" to tell you things in the first place. Startup founders seemingly have half an internet’s worth of “theys”, but not so much for the intrepid VC. Anyway, one of those things is the timing dynamic of your portfolio company outcomes (and how this serves to take an already arduous journey and add some light waterboarding along the way).
Everyone who starts a venture firm is, of course, familiar with early-stage startup failure rates, the power law, and the general distribution of portfolio company contributions for the average early-stage portfolio, but how that manifests itself over the life of any given fund (and. importantly, the psychological impact) is perhaps overlooked (we certainly overlooked it, anyway), so we thought we'd share some thoughts/learnings for the newer VCs out there, and maybe we can become their "they" (or something).
Silicon Alley Water Torture
As a quick refresher for those who don't spend all day in this wild world, the "power law" as it pertains to early-stage venture funds says that 80% of returns will come from 20% of your investments (or 75 from 25, 90 from 10 — depends on whose blog you’re reading, but you get the idea). Essentially, a lot of your companies will return 0-1x, leaving the remainder to generate all of the fund’s returns. Many years ago, the estimable Fred Wilson suggested you could expect a typical early-stage distribution to be roughly a 1/3 (zeroes), 1/3 (1x or so), and 1/3 (big returns). We expect to do considerably better than this third/third/third split, and we suspect USV has typically done better than this over the years as well, but it’s a decent general guideline.
This incredibly asymmetric return distribution happens in part because when you're investing in highly scalable companies, with huge TAMs, very early (i.e., at very low valuations), any one of them meeting even a part of their full potential can return 50x your initial investment (and once you get to full potential and exits in the billions, 100x+ is definitely on the table).
That's the fun part. The less fun part is that upside like this comes with a lot of risk, which means a lot of companies fall well short of their potential (or maybe didn't have as much potential as you thought to begin with). These companies are the ones who return 0 - 1x and are, of course, far more common than the 50-100x ones.
So we all go into this well aware of what's likely to happen, and we all endeavor to find the biggest of the big winners while also producing a couple more winners (of any size) than the average fund. If we're at least partially successful, we should outperform the market (if fully successful, we'll outperform by a very wide margin).
But when we think about what our ideal outcome will look like, we tend to think about that from the perspective of a fully-baked fund, ten or more years down the road when every company has exited or liquidated. As it is, that decade is chock full of a seemingly endless amount of time, effort, and land mine dodging, so it would still be hard, even if this were the way things play out. In reality, though, it’s considerably more painful than that.
Series Seed vs Series 7
The above version reminds us a bit of how financial regulatory exams work (or at least, how they worked 20 years ago when Matt last took one). You sit at a computer terminal for a few hours, grinding through 100+ questions, get to the end, hit "submit," and your score pops up a few seconds later.
That’s actually pretty nerve-racking… and it would be a delight compared to how the VC version plays out. In VC land, all of your biggest triumphs (those that will, in large part, make or break your final test score) all happen at the very, very end of those 10 (or more) years, while nearly all of your failures happen in the first 1 - 5 years.
So imagine that same regulatory test again, venturized -- there are the same 100 questions and an early-stage VC difficulty level (i.e., the average test taker gets only 30 - 50 of the questions even partially right), but...
Your right answers can be worth anywhere from 1 to 100 points, depending on how right your answer is (with the grading process being, at best, 70/30 merit-based/maddeningly arbitrary)
You're immediately alerted when you get an answer wrong and your wrong-answer tally sits in the corner of your screen. In huge red font. For the whole remainder of the test.
You're not given the final score of any of your correct answers until at least halfway through the test period, and then only one score at a time, with huge time gaps in between.
You generally don't find out your highest scores until you're a good 85 - 100% of the way through.
Whether you pass or fail could absolutely come down to the last question to be graded at the very, very end of the exam.
Oh, and even though they become rarer/less frequent, you can still be notified of additional wrong answers all the way through.
So… yeah.
But don’t be discouraged, aspiring VCs. We swear this is still really fun, and we absolutely wouldn’t trade it for any other job (seriously). Just make sure you go in with your eyes wide open (and your head on a swivel) and hang in there (you, too, LPs). You’ll get to the really good part eventually and the degree to which that good part can be good…? Well, there’s really no job (or investment) that compares.
Happy Labor Day to all! We’ll see you in a month (with a new company to introduce)!
C2V By The Numbers
We haven’t shared numbers for a while, so we thought we’d update you on what’s happening in our pipeline. In summary, our YTD performance has been strong, with a consistent flow of deals primarily sourced from non-VC channels. We've maintained a diverse portfolio, with half of our companies founded by women or minorities. Our current portfolio size stands at 55 companies across three funds, demonstrating our ongoing commitment to supporting innovative startups.
C2V Watercooler
Angel & Accelerator Online Conf
Chris will speak at the Angel & Accelerator Online Conf on Zoom on August 28th, starting at 12 PM ET for 4 hours (join any time).
Speakers from Techstars, AngelList, Antler, HustleFund, Idealab, Everywhere Ventures, B Capital, PSL, The Council, SparkLabs Group, +50 other VCs. Moderated by journalists from TechCrunch, Business Insider, & The Information.
Register here: https://inniches.com/angel
Some registration stats: 550 Angels, 151 Syndicates, 140 LPs, 325 VCs, 1,088 Founders, 198 Accelerators, 137 Family Offices, 179 Exited Founders, 331 Venture Studios. 584+ investors are looking for more deal flow from other investors. 687+ investors can share their deal flow.
Somatic Spotlight
Somatic cleaning robots have opened thousands of doors…and are now taking the elevator. Where to next?
Portfolio Highlights
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In the latest episode of the Open Wide Podcast, Jinesh Patel and Scott Drucker, DMD, MS, discuss several key topics in the dental industry.
Dykema DSO Industry Group Conference: They praised the recent conference hosted by Dykema and expressed their continued support for the event.
Dental Coverage Expansion: They discussed the growing bipartisan support for expanding dental coverage.
Dental Therapists: The role and potential expansion of dental therapists were explored.
Virtual Dental Care: The introduction of virtual dental care by Aetna, a CVS Health Company, was also discussed.