Episode 748 | The Ins and Outs of Startup Investing
Startups For the Rest of Us
Deep Dive
What is the typical return for a top quartile venture fund during a good decade like 2004-2014?
A top quartile venture fund during the 2004-2014 decade returned approximately 2.1x the invested capital. For example, a $100,000 investment would yield $216,000 over 7 to 10 years.
Why do most venture funds fail to beat the S&P 500?
Most venture funds fail to beat the S&P 500 because around 40% of them return less than 1x the invested capital, meaning investors lose money. Even top-performing funds only return 2.1x, while the S&P 500 often outperforms this over the same period.
What is the difference between angel investing and investing in a venture fund?
Angel investing involves making individual bets on startups, which can yield extremely high returns (e.g., 100x) but carries significant risk of losing the entire investment. Venture funds, on the other hand, spread risk across multiple investments, reducing the chance of total loss but also capping potential returns to more modest multiples like 2x or 5x.
Why is deal flow critical for successful startup investing?
Deal flow is critical because it determines the quality and quantity of investment opportunities. Without access to high-quality deals, investors cannot make informed bets or negotiate favorable valuations, which are essential for achieving strong returns.
How does TinySeed differ from traditional venture capital funds?
TinySeed focuses on capital-efficient B2B SaaS companies that don't require multiple funding rounds. Unlike traditional VC funds that rely on billion-dollar exits, TinySeed targets smaller, more frequent exits in the $50-100 million range, allowing founders and investors to succeed without needing massive outcomes.
What is the significance of valuations in venture investing?
Valuations are critical because they determine the entry price for investors. Overpaying for a startup (e.g., investing at a $25 million pre-revenue valuation) makes it difficult to achieve strong returns unless the company reaches a massive exit. TinySeed focuses on reasonable valuations to ensure better returns for investors.
Why do many venture funds prioritize markups over actual exits?
Venture funds prioritize markups because they use them to demonstrate portfolio performance to investors (LPs). Markups occur when a startup raises additional funding at a higher valuation, which can make the fund appear successful even if no actual exits have occurred. This is a key metric for raising subsequent funds.
How does TinySeed evaluate the performance of its portfolio companies?
TinySeed evaluates performance using a revenue-based multiple (2x to 7x) rather than relying on markups from subsequent funding rounds. This approach provides a more conservative and realistic assessment of a company's liquidation value, aligning with TinySeed's focus on capital efficiency and smaller exits.
What is the 1-9-90 rule in startup funding?
The 1-9-90 rule suggests that 1% of startups should pursue venture capital, 9% should raise some form of funding (e.g., angels or TinySeed), and 90% should bootstrap. This framework highlights how the venture capital model leaves out many founders who could benefit from alternative funding strategies.
Why does TinySeed keep its fund size relatively small compared to traditional VCs?
TinySeed keeps its fund size small to maintain focus on capital-efficient B2B SaaS companies and avoid diluting its investment strategy. Unlike traditional VCs that scale fund sizes to increase management fees, TinySeed prioritizes consistent deal flow and targeted investments over rapid growth.
- The stigma of bootstrapper funding is waning.
- More founders are considering raising funding.
- It democratizes starting a SaaS business.
Shownotes Transcript