First Believers Resources

Week 1 - Notes

Week 2 - Notes

Summaries

Why

• Simon Sinek Start With Why

VC vs. other asset classes

• Venture vs. Stocks & Real Estate

  Aspect	Venture Capital	Stocks	Real Estate
  Accessibility	Accessible mainly to accredited investors (Higher risk)	Open to the general public through brokerage accounts.	Direct investment is capital intensive; Indirect investment available via REITs and real estate funds.
  Risk Profile	High risk Potential for high reward. Significant proportion of investments may fail.	Moderate risk, varies widely between stock types (e.g., blue-chip vs. penny stocks). Diversification commonly used to mitigate risk.	Typically lower risk compared to stocks and VC Property values can be stable and sometimes appreciate even during market downturns.
  Return Profile	Potentially very high returns (e.g., 4,000x for early Uber investors) Many investments yield no return.	Returns vary; dividends and capital gains are possible. Growth stocks can offer high returns similar to venture capital but generally less extreme.	Returns depend on property type and market conditions; historically, provides steady, reliable returns.
  Liquidity	Low liquidity Capital is typically locked in for long periods (4-10 years).	High liquidity Stocks can be bought and sold rapidly on public exchanges.	Lower liquidity than stocks Selling real estate can take time, and market conditions heavily influence sales success.
  Investment Structure	Investments are typically structured as equity or convertible debt in private companies.	Investment through purchase of public company shares.	Can be direct (buying property). Indirect (REITs, private equity real estate funds). Both debt and equity structures are used.
  Market Dynamics	Valuations are highly uncertain and fluid (esp. early stages). Investment exits typically via IPOs or acquisitions. Both debt and equity structures are used.	Market valuations are transparent and updated in real-time Due diligence focuses on financial metrics, market position, etc., without direct management interaction.	Influenced by local economic conditions, interest rates, demographic trends, and other external factors.
  Due Diligence	Focus on evaluating potential for disruption, business model viability, founder capabilities, etc.	Analysis based on financial statements, market conditions, competitor performance, etc.	Involves assessment of property conditions, location, market trends, tenant profiles, etc.
  Typical Hold Period	Long-term (several years to over a decade).	Can be short-term (days to months) or long-term (years), depending on investment strategy.	Long-term; selling property can take time and is influenced by market readiness.
  Regulatory Environment	Highly regulated with specific requirements for investor qualification (accreditation).	Regulated by securities authorities (e.g., SEC in the U.S.); requirements for trading and disclosure are stringent.	Also regulated, with requirements varying significantly between regions (zoning laws, land use regulations, etc.).
  Return Correlation	Returns are uncorrelated with traditional asset classes, offering diversification benefits.	Correlation with market indices and general economic conditions can be high. Venture capital performance may diverge from stock market trends.	Often seen as a hedge against inflation; less sensitive to stock market fluctuations but not entirely uncorrelated.
  Strategic Considerations	Suitable for investors with a high risk tolerance and a long-term investment horizon.	Suitable for a wide range of investors; offers flexibility in terms of capital allocation and risk management.	Attractive for those seeking stable, passive income and typically, capital appreciation over time.

• Venture Capital Positively Disrupts Intergenerational Investing

  Aspect	Details
  Purpose of VC in Intergenerational Wealth	VC offers the potential for high returns and serves as a bridge between generations in family wealth management. It helps sustain wealth across generations, engages younger family members by involving them in dynamic market sectors, and unifies the family around common goals of wealth growth and social impact.
  VC's Role in Portfolios	VC is highlighted as a means to gain exposure to emerging technologies and industries early on, potentially reaping higher returns compared to public equities. The report suggests a meaningful allocation towards VC to capitalize on these opportunities, especially given its advantageous tax treatment which enhances portfolio growth.
  Educational Aspect	Introducing the next generation to VC investing is not only about wealth management but also educational, providing them with insights into market disruptions and the mechanics of venture investments. This process helps maintain family unity and ensures a smoother transition of wealth management principles and responsibilities.
  Potential for Impact	VC investments are seen as avenues for making a significant impact, both financially and socially, aligning with the growing trend of impact investing. Families can use VC as a tool to contribute to societal challenges while generating substantial returns, thereby aligning investment goals with personal values.
  Market Trends and Data	The document references several figures illustrating the performance and growth of VC investments. For instance, top-performing venture funds have shown compelling returns, and the allocation towards VC has been increasing among institutional investors. It's suggested that even higher allocations might be suitable for families with long investment horizons and sufficient liquidity.
  Risk Management	Despite the high returns, VC is associated with high risks. The report notes improvements in fund management strategies that have reduced loss ratios from the 1990s levels, suggesting that modern VC can offer a risk-return profile more similar to private equity. Diversification across multiple VC funds is recommended to mitigate risks.
  Long-Term Strategic Value	VC is positioned as a critical component for future-oriented portfolio construction, especially important as public markets shrink and private markets grow. Families are encouraged to consider significant allocations to VC to benefit from its potential in a changing economic landscape where private companies play a predominant role.

  Conclusion
  Venture Capital is framed not just as an investment vehicle but as a comprehensive strategy that involves educational growth, family bonding over shared goals, and alignment with long-term generational planning. This approach is proposed to ensure that family wealth not only endures but thrives through proactive engagement with innovative sectors and sustainable investments.

• What AngelList Data Says About Power-Law Returns In Venture Capital

  Aspect	Details
  Power-Law Distribution	Early-stage venture investments exhibit a power-law distribution, where a few high-performing investments (outliers) generate disproportionately large returns, skewing overall portfolio performance. This distribution contrasts with a log-normal distribution which would predict a more even spread of returns.
  Implication of Power Laws	In a power-law world, the presence of a home run investment is crucial. High-return investments dominate the performance of the entire portfolio, suggesting that the most successful venture strategies focus on identifying potential blockbuster investments rather than avoiding losers.
  Evaluation of Power-Law Hypothesis	Using AngelList’s data, the study evaluated the power-law hypothesis by analyzing returns of investments before Series C that are at least one year old. The analysis confirmed that returns indeed follow a power-law distribution, rather than a log-normal distribution, particularly evident at the extreme upper end of return multiples.
  Market Performance vs. Individual VCs	The study suggests that an indexing strategy, which involves investing uniformly across the available early-stage venture universe, would likely outperform the majority of individual early-stage venture capital funds due to the power-law nature of returns. This is because individual managers often fail to pick the few outliers that drive the bulk of returns, whereas an indexing approach would inherently capture these.
  Role of Fees	Including typical management fees and carried interest (carry), individual fund managers' returns are often less competitive against the market return. Simulations showed that even after accounting for fees, market indexing strategies outperform the majority of venture capital managers. This finding challenges the traditional active management approach in venture capital.
  Statistical Analysis	The shape parameter (α) of the power-law distribution was found to be about 2.3, which suggests a heavy tail of high returns. This indicates that venture investments can potentially offer very high returns, supporting the strategy of looking for investments that can significantly outperform.
  Investment Strategy Recommendations	The analysis supports Peter Thiel’s strategy of focusing on a small number of potential high-return investments. However, the broad implication is that unless a VC can consistently access top-quartile deals, they might be better off with a passive indexing strategy that ensures exposure to all high performers, thereby maximizing the chances of hitting the home run investments necessary to achieve superior returns in a power-law dominated environment.

  Conclusion: The insights from AngelList’s data reaffirm the power-law nature of venture capital returns and suggest that indexing strategies might be more effective than active management for most investors. This shifts the perspective from trying to avoid poor investments towards ensuring participation in all potential high-return opportunities, thus leveraging the asymmetric bet that is early-stage investing.

Advocates for diversification

• The Pervasive, Head-Scratching, Risk-Exploding Problem With Venture Capital

  Aspect	Details
  Risk Concentration and Diversification	highlights that traditional VC funds often fail to diversify sufficiently (exacerbates risk) many funds concentrate investments strategy often leads to high dispersion in returns, with a few top performers delivering the majority of gains
  Investment Strategy and Fund Structure	VC funds are typically structured to pursue outsized returns through a few successful deals. Really, really, successful deals are exceedingly rare 0.4% of all deals return more than 50 times the invested capital larger portfolios of around 500 investments might be necessary to reliably capture these outlier returns Ummmm... syndicate?
  Market Dynamics vs. Portfolio Size	Monte Carlo simulations - funds with around 500 investments tend to have a more stable return profile argument for higher diversification VC
  Challenges in Achieving Diversification	operational challenges associated with managing a highly diversified fund of 500 or more investments cultural and economic disincentive for venture capital managers to diversify Ask: If it is hard for a VC, how does an angel do it?
  Institutional and Investor Implications	For institutional investors and family offices, the article suggests that to mitigate these risks and potentially enhance returns, building a diversified portfolio of VC investments is critical. This strategy should include diversification across geographic regions, sectors, stages of company development, and, importantly, across different management teams and fund strategies. These folks are playing at a higher level than I am!

  Conclusion:
  Underscores a critical reevaluation of how VC funds operate and how investors should approach VC to optimize their returns while managing the inherent risks. Argues for a significant shift towards broader diversification, challenging the conventional wisdom of focusing on a small number of potentially high-return investments.

Advocates for concentration

• Venture Capital — No, We’re Not Normal

  Aspect	Details
  Nature of VC Returns	Venture capital investments are characterized by a highly skewed distribution of outcomes. The majority of capital invested does not yield profitable returns, while a minuscule percentage of deals (less than 4%) generate returns of 10X or greater.
  Distribution Dynamics	The skew is more pronounced when analyzing the distribution by number of financings compared to the distribution by invested dollars. Early-stage investments, despite their smaller average size and higher risk, disproportionately influence the success rates due to their higher potential returns.
  Historical Trends and Hit Rate	The article discusses the 'hit rate'—the percentage of invested dollars that achieve a 10X or greater return—illustrating that this rate has fluctuated over time but has been increasing in recent years. This trend suggests a recovery to early 1990s levels. Notably, there's a strong correlation (0.98) between industry mean returns and the hit rate, underscoring that top-performing financings drive overall industry returns.
  Implications for VC Strategy	Given the distribution and impact of outlier investments, a common VC strategy is to 'swing for the fences,' focusing on potential breakout winners while avoiding capped-outcome investments. This approach is rational within the VC framework, which thrives on high-risk, high-reward bets rather than conservative, predictable outcomes.
  Correlation Ventures	The author’s firm, Correlation Ventures, exemplifies an active investment approach in the VC industry. With substantial funds under management, the firm emphasizes a rapid and data-driven co-investment strategy, positioning itself as a reliable partner for lead investors and syndicates. They highlight their efficient decision-making process, promising investment decisions within two weeks, which is particularly appealing in the fast-paced venture environment.

• Gambling Is Not A Thesis: Early-Stage VC Investment Strategy

  Aspect	Details
  Critique of Random Investment Models	Criticizes the use of Monte Carlo Simulations for VC investment strategies argues this is mistakenly apply random chance methodologies that are actually deterministic merely increasing the number of investments will not proportionally increase success rates
  VC Investment Realities	VC investments are predominantly hit-driven small percentage of successes ('unicorns') must compensate for the majority that fail skewed outcome distribution suggests VC is more akin to a skill-based selection process rather than gambling
  Strategic Investment Recommendations	Effective VC strategy should involve careful selection and support of potential high-performers rather than spreading resources thinly across too many startups argues for investing with the intention to actively manage and aid the development of chosen startups sniper approach than a shotgun approach to investing
  Data Analysis and Implications	highlights that successful VC funds characterized by ability to discern and nurture potential unicorns nurture potential unicorns vs spray and pray
  Guiding Principles for VCs	VCs should focus on startups that not only show promise of high returns but are also within the VCs' area of expertise and understanding Diversification in VC should not mimic strategies used in stock portfolios but should be more purposeful and selective

Neutral

• How angel investing gives Gopi Sara the taste of early-stage startup life he craves

  Aspect	Details
  Personal Drive	Gopi Sara, described as an 'aspiring startup founder without an idea,' investment strategy focuses not just on financial returns but on personal involvement with the startups he invests in
  Investment Strategy	made eight angel investments in 18 months preferring direct involvement over merely financial contributions avoiding a widespread scattergun approach
  Relationship with Startups	significant relationship is with OfferFit (martech) connecting them with potential customers strategizing APAC expansion plans involvement grew over time became OfferFit’s Director of Strategic Accounts APAC
  Investing Insights	importance of understanding founders' motivations / potential beyond just the surface details personal interactions with founders are crucial to assess the viability and desirability of investing
  Broader Investment Lessons	necessity of a strong network importance of adding value beyond capital (like making strategic introductions) reevaluating risk assessment techniques learned in consulting to suit the high-risk nature of startups emphasizes continuous education and mentorship in angel investing as critical to success

• Thiel vs. AngelList. Who is Right?

  "Thiel vs. AngelList: Who is Right?" compares the viewpoints of Peter Thiel and Abe Othman of AngelList:
  
  

  Aspect	Peter Thiel	Abe Othman
  Portfolio Strategy	Advocates for a concentrated portfolio of about seven to eight companies, each with potential for a 10X return.	Supports a larger portfolio to include more "winners", utilizing the power law distribution of returns.
  Risk and Return	Emphasizes potential for very high returns at the risk of higher volatility and possible total loss.	Argues that a larger portfolio reduces risk and ensures more consistent returns, though it may sacrifice some potential for extraordinarily high returns.
  Statistical Rationale	Smaller portfolios may increase the chance of hitting high returns due to focused investment strategies.	Larger portfolios are statistically more likely to achieve median returns close to the mean due to the Central Limit Theorem.
  Operational Approach	A small, selective portfolio allows VCs to deeply engage and add substantial value to fewer companies, potentially enhancing their success rates.	A broader portfolio strategy mitigates risks and maximizes returns across a wider array of investments, capturing more outliers.
  Investment Philosophy	Concentrated investments should be in ventures where the VC has high confidence and can significantly influence outcomes.	Diversification across a broad number of ventures spreads risk and taps into the benefits of statistical return distributions.

  Conclusion: Concludes that there is no one-size-fits-all answer to the optimal VC portfolio size, both have merit, choice largely depends on an investor's specific circumstances, objectives, and investment acumen...