| The Home Run Mentality in Venture Capital: the 80/5 Principle |
| 10 August 2007 |
As an American that misses baseball, and in the spirit of the boys of summer, I can't help but mention that Barry Bonds hit his 756th All-time Home Run on August 7th, breaking Hank Aaron's long-standing record of 755 set in 1974. Despite the controversy over steroid use, we must remember that Babe Ruth did it on hot dogs and beer, and it is an incredible moment in baseball history and for its fans. Way to go, Barry!
Within the reference of the home run, in my last post regarding Guy Fraser-Sampson's book, Private Equity as an Asset Class, I highlighted a very interesting statistic regarding the need for Venture Capitalists to "swing for the benches" and look for home runs when making investments. GFS had a very interesting chart in his book that observed this statistic from the famous data released from Horsley Bridge. Last week, a lot of traffic came from search criteria looking for this very data. Here are the basics that I have somewhat reproduced here:
The idea is that an investment in a potential "home run" at 5% of cost to the fund will produce 80% of total returns for the fund. This is not to say that it is easy, but VC's should be aggressive in this mentality to get this type of return. GFS reminds you to please not confuse this concept with buyout funds. The concept of having a home run mentality does not really work for the buyout space. However, we could see this principle go down in history (courtesy of Horsley Bridge) much like in comparison with the 80/20 rule. Its an impressive statistic and is very telling as to why the Netscapes, the Googles, and the YouTubes of the world are every VC's objective.
Now if only we can get something to come out of Turkey in comparison.
 Technorati Tags: Private Equity as an Asset Class, Guy Fraser-Sampson, Venture Capital, Private Equity, Home Run, Horsley Bridge, investment, 80-05 Rule, Barry Bonds, VCLabels: exits, Home Run, Investments, statistics, Venture Capital
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Along with many people in Bay Area, I'm not a Bonds fan but it was interesting to see a historical moment.
I agree with your conclusions on home runs fitting more VC investments. If you look at the number of deals per year at a buyout firm vs. VC firm does, you can easily see the diff in mentality. Having said that, you see a lot VCs moving to more stage-agnostic investment thesis to get faster and larger returns on late stage deals.
It'll be interesting to see how buyout firms perform in investments in turkish companies. I think TR is more sutiable for late stage investments due to entrepreneurial mindset and the risk profile. A post-revenue company with potential to grow into different markets is much more attractive than pre-launch venture. Love to hear your thoughts on this.
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Publisher: Jon H. Black
Along with many people in Bay Area, I'm not a Bonds fan but it was interesting to see a historical moment.
I agree with your conclusions on home runs fitting more VC investments. If you look at the number of deals per year at a buyout firm vs. VC firm does, you can easily see the diff in mentality. Having said that, you see a lot VCs moving to more stage-agnostic investment thesis to get faster and larger returns on late stage deals.
It'll be interesting to see how buyout firms perform in investments in turkish companies. I think TR is more sutiable for late stage investments due to entrepreneurial mindset and the risk profile. A post-revenue company with potential to grow into different markets is much more attractive than pre-launch venture. Love to hear your thoughts on this.