1/21: There’s been a lot of talk about how difficult it is to produce great returns in the VC space, and while this is true it suffers from over-simplification. Unpacked:
2/21: First, while the analysis of Fund performance is vaguely interesting it doesn’t reflect the fact that different Funds are chasing different objective functions as are their LPs.
3/21: A bigger fund might be targeting a lower volatility 2.5X portfolio while a smaller fund might be targeting a higher risk 5.0X portfolio. Results need to be measured against goals.
4/21: Second, the risks being taken at the individual investment level drives the distribution of outcomes. Some forms of risk are “riskier” than other forms of risk.
5/21: One VC might invest in companies with zero market risk but massive technical risk building products trying to solve profound problems like curing cancer (i.e. – @PactPharma).
6/21: Another VC might want to invest in companies with market risk that are building models that attempt to “Re-imagine The World” or “Blow Up Incumbents” (i.e. – @Uber)
7/21: Another VC might want to invest in companies in established markets where there’s an emerging better way of solving a known problem or the start of an adoption cycle for a new technology (i.e. – @Stripe)
8/21: Each profile has its own risk/return tradeoff so lumping all VC Funds and therefore VC Strategies into a single bucket is a major narrative violation.
9/21: About a year ago I wrote a post about this topic: fintechjunkie.com/2019/03/04/ram…
10/21: Third, market forces define how difficult it will be for a business to succeed. It’s better to be a pretty good Founder in an exceptional market than an exceptional Founder in a pretty good market.
11/21: Not everyone agrees with my last point but I’ve come to learn that Founders are mere mortals (I haven’t met a superhero yet) and there are times that even the best talent can’t solve structural issues.
12/21: Fourth, the outcome periods in Venture Investing are so far in the future that poor decision making can persist for a long time. This structurally means that the asset class will have a tail of terrible outcomes.
13/21: Aside: To minimize the impact of poor VCs persisting, LPs should spend more time underwriting the quality of the analysis and decision making processes of VC check writers.
14/21: Just like in Poker, the best way to repeatably win is to focus on making +EV decisions over and over. Fixate on decisions, not results. Great results are a direct result of +EV thought processes.
15/21: By no means is this a complete analysis, but putting the above snippets together you can hopefully see why it’s flawed to analyze the asset class as a whole.
16/21: What I can personally share is that @QEDInvestors is on pace to deliver 3X+ MOIC for each and every one of our maturing Funds.
17/21: Much of this has to do with the pond that we’re fishing in (fintech and adjacencies) and much of this has to do with the team we’ve assembled and the discipline of our investment process.
18/21: The companies we tend to invest in attack known problems that have historically been solved by traditional financial institutions.
19/21: You can look country by country and you’ll find that some of the most profitable companies on the face of the planet are financial institutions.
20/21: So, building businesses that participate in these massive profit pools is a great place to plant LP dollars, especially when the risks are much more knowable than in some ecosystems.
21/21: Just my two cents. Peace out.

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More from @fintechjunkie

10 Sep
1/21: I pulled a thread together a few weeks ago about how the early stage fintech ecosystem has gotten a bit crazy and overheated. . Since then I was asked to comment on the later stage madness. Unpacked:
2/21: The first thing to understand is that venture capital as an asset class is actually quite small. In 2019 about $136B of capital was deployed in the US with exits of about $256B.
3/21: Massive individual wealth can be generated for LPs and GPs if great investments are made and fortunes can be amassed for the Founders of break-out companies. But as an asset class the total money at work is quite small.
Read 21 tweets
28 Aug
1/19: The most disturbing trend I’m seeing in the early stage fintech ecosystem is the raising of 2-3 back-to-back rounds with minimal progress in-between. Unpacked:
2/19: I think of venture investing as a very simple thing. VCs invest in Founders who are building businesses that solve big problems.
3/19: Founders pitches describe a large profound problem, their solution to the problem, and the financials the business will generate over time
Read 19 tweets

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