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- #115 VC Data, Portfolio Construction, Recycling
#115 VC Data, Portfolio Construction, Recycling
Hi everyone! 👋 We’ve published >100 posts - appreciate the support/ sharing w/ friends! Welcome to our new members of @TheFundCFO crew! We recently launched a paid tier and released our VC Fund Playbook + Models @ Streamlined.Fund! Re-linking top posts: #96 The Case for 30+ Co.'s Per VC Fund, #88 Latest Takes on the State of VC, #86 VC Fund Stacks, and Full CFO Archive.
There’s a lot of great content from notable VCs, LPs, and CFOs/finance pros on the internet. Here, we’re focused on pulling out the insights out that really matter, as well as finding the most current content that overlays historical lessons with current market dynamics, which are changing faster than ever.
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“I’ve failed over & over again in life. And that is why I succeed.” -Michael Jordan
Recently, we shared our top posts from October (+September) - these ones really resonated with thousands of views, shares, and feedback! Please do us a favor and like/share if you haven’t already (or forward to a friend). In the meantime, enjoy! Re-linking here for reference!
As we approach Thanksgiving and year-end model updates, we’ve been going back and reviewing a number of data-driven portfolio construction posts. A post that we had flagged was one from Level Ventures this fall where they shared the following:
“Many hyped companies look attractive on the surface. They tend to have a compelling product vision, a qualified team, and a vast market opportunity. Yet, despite these qualities, are their high entry valuations too restrictive for the return profile necessary to generate outlier fund returns? Plotted below are the 50x+ return hit rates of seed (& pre-seed) investments where the post-money valuation was below $20M vs. those where the post-money valuation was >$20M:
As you can see, the trend is clear: seed (& pre-seed) deals with a below $20M post-money have (on average) 280% the probability of producing a 50x+ hit as compared to their higher valued counterparts.” We recommend checking out the full post via the link above.
We’ve written a lot here about portfolio construction. We appreciated the following post and tables that James Heath recently shared:
A top 100 seed fund has a 2% chance of hitting a unicorn. You may invest in one company and it becomes a unicorn, but the best in the game only hit it one in every 50
Do LPs want concentrated or larger portfolios? A smaller portfolio delivering an outlier increases fund returns significantly, but they're required to hit a unicorn 2.5x as often
Some LPs want to control construction, some don't. We have GPs with 15 companies and 40%+ IRRs and GPs with hundreds of companies per vintage with multiple outliers
I like to leave construction to the manager. Let GPs argue their case for their construction and invest in those where you have the highest conviction.
