Class weblog
Following up on our lecture regarding strategies for hit-driven industries, RightSide Capital recently announced their novel approach to the VC market. This coincides well with the ‘diversification of risk’ strategy that quite a few of us raised.
What are your thoughts? Is this strategy going too far, or will this type of approach work? How might this strategy be applied in other hit-driven industries?
Kartik Hosanagar is an associate professor of Internet Commerce at The Wharton School of the University of Pennsylvania. Kartik's research work focuses on Internet media and Internet marketing.
Kartik is a cofounder of Yodle Inc and is actively involved with several other startups as either an investor or board member.
Vibhanshu Abhishek is a fourth-year doctoral candidate in the Operations and Information Management department at the Wharton School of the University of Pennsylvania.
Andrés Catalán was the much loved TA of this class in 2010. He is currently a fourth-year doctoral candidate in the Operations and Information Management department at the Wharton School of the University of Pennsylvania.
about 1 year ago
I kind of like the honesty in this approach. Here is why:
Coming from the investment management world before Wharton, I am tired to see money managers who claim they can do a better-than-average asset picking job. Needless to say, only part of this crowd can be above average, but no one can admit they are below average, or else they die. In addition, it is very hard to see consistency in performance over longer periods of time. Result: few guys are really good at it, many guys are jokers claiming to be something they are not. Most investors are ‘fooled by randomness’ (I like this expression to describe what really happens, even though I have not read this book yet…)
In my view, the VC industry is just the same. However, it is harder to measure performance due to the lack and complexity of data regarding funds’ returns.
What these guys from RightSide are doing is at least sincere: “since chances are this is kinda random anyways, we won’t even bother bullshitting our way through the sales pitch.”
Don’t expect stellar results though. Probably, with this approach, they won’t do much better than… you guessed right: the average!
Actually, if they are able to come up with a very good algorithm, a good standard legal structure and if they have done the math right, they might do a somewhat decent job, since a rigid application process might help to filter crappy investments that would somehow be approved in the ‘gut feeling’ department. They would probably weed out the next Google as well, but that’s not what they are looking for (and that’s why I mentioned that they need to have done the math right… if they think they can reach decent returns with smaller exits).
In sum: I believe there are VCs who are actually good, but they are few. And what I like about RightSide’s approach is its honesty, not its prospects of amazing returns.
You can expect, though, many attacks from the ‘regular’ VCs. After all, they need to justify their paycheck.
about 1 year ago
If an algorithmic measure of experience and technical ability can properly forecast a team’s execution, I think this is a solid idea. Instead of investing in a basket of companies with a common thread, VCs should worry more about execution. The idea is important in the sense that it brings a team together, but it can only go so far.
CD Baby CEO Derek Silvers has a great quote on this. He thinks of ideas as money multipliers.
” AWFUL IDEA = -1
WEAK IDEA = 1
SO-SO IDEA = 5
GOOD IDEA = 10
GREAT IDEA = 15
BRILLIANT IDEA = 20
NO EXECUTION = $1
WEAK EXECUTION = $1000
SO-SO EXECUTION = $10,000
GOOD EXECUTION = $100,000
GREAT EXECUTION = $1,000,000
BRILLIANT EXECUTION = $10,000,000
To make a business, you need to multiply the two.
The most brilliant idea, with no execution, is worth $20.
The most brilliant idea takes great execution to be worth $20,000,000.”
–Maybe this is what this new “spray” approach is getting back to.
about 1 year ago
I really dig the way Silvers breaks that down – people often talk about the importance of execution, and he has a little model that quantifies the importance of it. Perhaps RightSide will put a lot of weight into previous success – and such success is a proxy to ability to execute?
I love the idea of making docs more standard – how much time and effort is wasted on those documents right now? I don’t know enough about VC to know the potential costs of standardizing come exit time, but my gut tells me that it will be a net win for both the fund and the companies in terms of time and cost savings.