Jun 5, 2011

The Fitness Function of a Venture Capitalist

"The fitness function of a venture capitalist — meaning the metrics of performance, the report card — is pretty pure. You show up with money, and one way or another more money has to come back than goes in." Bing Gordon
Oftentimes it's best to reduce things to the base elements, in order to really understand things. I am fascinated by the transformation that has occurred over the last five years in the funding of early stage technology companies, and the resulting transparency around this process. Angel investors, seed investors, micro-VCs, angel lists, secondary markets, no-cap convertible notes, liquidation preferences, etc - these terms and concepts, once arcane, are now discussed and debated openly and with vigor. And this transparency leads to efficiency.

But it can also lead to a form of confusion. For the job of a professional investor is simple - to gain a return on money. To deliver outsized returns relative to the risk - some level of returns greater than can be achieved by, say, investing in public liquid markets.

A venture investor can achieve this with numerous tactics: stage focus, sector focus, geographical focus. Expertise in financial matters, marketing, relationships. Friendly, fair terms. Incubation. Doubling down. All these matter, but they are merely tactics.

The strategy, in turn, always remains the same - "more money has to come back than goes in." I like to say it as "own large pieces of very big companies." Either way, the spread between the money that has gone out and that which has come back is the measure of success, and it is the only measure of success for a venture investor.

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