1 hr 3 min

Is early stage venture capital not only biased but also a glorified lottery ticket selection‪?‬ FINTECHTALK

    • Technology

Hi FINTECHTALKERS, (These opinions are mine and not of the guests of my show)
It is commonly accepted wisdom in Silicon Valley that venture capital (VC) portfolio, especially early stage, follow the power law and not the normal distribution - a small number of investments make huge returns whereas a large number don’t even return the invested capital. Given this reality, venture capitalists focus on startups with odds of achieving higher-than-average success, a fact they openly acknowledge. It is frequency vs. magnitude of success or the assessment of that at an early stage. This assessment is very subjective as they prioritize specific trends or ideas simply because they're popular within their social circles or if the founding team has connections within their extended network. Simply put, it is group think with a lot of bias which are not signals of business success or any value analysis. To make matters worse they think this is a strength. Vinod Khosla, a prominent Silicon Valley venture capitalists (VCs) and the founder of Khosla Ventures, candidly admitted to Harvard Business Review that the power dynamic swiftly shifts when VCs become enthusiastic about a startup, particularly if it receives offers from other firms. "The best startups with inspiring entrepreneurs face intense competition for funding," he remarked. However, what is seldom said is that minority founders, such as Black or Latino founders, often do not fit the profile of “best startups” or “inspiring entrepreneurs” due to biases inherent within these elitist capital allocators. 1 2 3.
A living example of this bias is Tope Awotona, the now billionaire founder of Calendly. Awotona, a black entrepreneur from Atlanta (originally from Nigeria), bootstrapped Calendly by draining his bank and 401(k) accounts, according to publicly available news articles and Calendly website (see screen shot below). It wasn't until eight years into his journey that he raised venture capital, Calendly now is valued at over $3 billion (he may have got some seed capital from a local Atlanta Ventures). Awotona likely did not meet the “inspiring entrepreneurs” label for Khosla and his Silicon Valley peers. Mr. Awotona persisted but several others don’t and cannot.
Source - Calendly Website
“I raided my bank account and 401(k) to launch Calendly in 2013. Eventually, I ran out of money and started to seek VC funding. I had a working product, and customers using it, and everyone said no. Meanwhile, I watched other people who fit a different “profile” get money thrown at them for shitty ideas. Those VCs were ignorant and shortsighted. The only thing I could attribute it to was that I was black,” he told media. Tope Awotona as quoted in https://peopleofcolorintech.com/ Emphasis added

Moreover, when a startup garners the backing of VCs, these investors often pull out all the stops to ensure its success. They employ various mechanisms, such as venture debt and mutual co-investments at inflated valuations, practices that go unscrutinized in private markets but arguably should be, especially considering that much of the capital originates from pension funds and 401(k)s. In the wake of the SVB collapse, VCs have lost access to tools like venture debt that were once used to amplify leverage and prop up valuations. This shift demands a more value-based approach to portfolio construction. Previously, VC-friendly banks like SVB facilitated venture debt through concentrated deposits, a strategy encouraged by Silicon Valley VCs who insisted their portfolio companies bank there. I explored this issue last year, highlighting concentration risk and the perils of venture debt as key factors in SVB's downfall. Private investments, especially in early-stage ventures, don't get scrutinized much, allowing for big gambles (unreal valuations) and the ability to influence co-investors. However, if factors such as race are influencing investment decisions, aren't we on a slippery s

Hi FINTECHTALKERS, (These opinions are mine and not of the guests of my show)
It is commonly accepted wisdom in Silicon Valley that venture capital (VC) portfolio, especially early stage, follow the power law and not the normal distribution - a small number of investments make huge returns whereas a large number don’t even return the invested capital. Given this reality, venture capitalists focus on startups with odds of achieving higher-than-average success, a fact they openly acknowledge. It is frequency vs. magnitude of success or the assessment of that at an early stage. This assessment is very subjective as they prioritize specific trends or ideas simply because they're popular within their social circles or if the founding team has connections within their extended network. Simply put, it is group think with a lot of bias which are not signals of business success or any value analysis. To make matters worse they think this is a strength. Vinod Khosla, a prominent Silicon Valley venture capitalists (VCs) and the founder of Khosla Ventures, candidly admitted to Harvard Business Review that the power dynamic swiftly shifts when VCs become enthusiastic about a startup, particularly if it receives offers from other firms. "The best startups with inspiring entrepreneurs face intense competition for funding," he remarked. However, what is seldom said is that minority founders, such as Black or Latino founders, often do not fit the profile of “best startups” or “inspiring entrepreneurs” due to biases inherent within these elitist capital allocators. 1 2 3.
A living example of this bias is Tope Awotona, the now billionaire founder of Calendly. Awotona, a black entrepreneur from Atlanta (originally from Nigeria), bootstrapped Calendly by draining his bank and 401(k) accounts, according to publicly available news articles and Calendly website (see screen shot below). It wasn't until eight years into his journey that he raised venture capital, Calendly now is valued at over $3 billion (he may have got some seed capital from a local Atlanta Ventures). Awotona likely did not meet the “inspiring entrepreneurs” label for Khosla and his Silicon Valley peers. Mr. Awotona persisted but several others don’t and cannot.
Source - Calendly Website
“I raided my bank account and 401(k) to launch Calendly in 2013. Eventually, I ran out of money and started to seek VC funding. I had a working product, and customers using it, and everyone said no. Meanwhile, I watched other people who fit a different “profile” get money thrown at them for shitty ideas. Those VCs were ignorant and shortsighted. The only thing I could attribute it to was that I was black,” he told media. Tope Awotona as quoted in https://peopleofcolorintech.com/ Emphasis added

Moreover, when a startup garners the backing of VCs, these investors often pull out all the stops to ensure its success. They employ various mechanisms, such as venture debt and mutual co-investments at inflated valuations, practices that go unscrutinized in private markets but arguably should be, especially considering that much of the capital originates from pension funds and 401(k)s. In the wake of the SVB collapse, VCs have lost access to tools like venture debt that were once used to amplify leverage and prop up valuations. This shift demands a more value-based approach to portfolio construction. Previously, VC-friendly banks like SVB facilitated venture debt through concentrated deposits, a strategy encouraged by Silicon Valley VCs who insisted their portfolio companies bank there. I explored this issue last year, highlighting concentration risk and the perils of venture debt as key factors in SVB's downfall. Private investments, especially in early-stage ventures, don't get scrutinized much, allowing for big gambles (unreal valuations) and the ability to influence co-investors. However, if factors such as race are influencing investment decisions, aren't we on a slippery s

1 hr 3 min

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