Author Archives: Hervé Lebret

The (Recent) Impact of Venture Capital on Startups

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I have regularly been puzzled with the (real) impact of venture capital on startups, their growth or even their success. A few days ago, I received an email from a friend with a very interesting table.

The measure of capital productivity is given by the ratio a/b where a is the startup revenue at the time of IPO and b is the amount of venture capital raised by the startup before going public. The 4 big tech companies are Apple, Microsoft, Amazon and Google, 4 companies founded before 2000. The ratio a/b is greater than 10. The recent VC or IPO deals give ratios below 1 and closer to 0.1.

So it was easy for me to look at my usual cap. tables (check here if you do not know what I talk about). I have now 880 companies and I sorted this a/b ratio over time. Here is the result:

I have 272 biotech startups and 361 in the Software and Internet fields (the others are hardware, semiconductor, energy, medtech companies mostly). I have the a/b ratio (which I call Sales to VC) by period of 5 years (the years of foundations of the startups). I also pu the PS ratio (the famous Market Capitalization to Sales or “Price to Sales” ratio). Indeed the ratio is “collapsing” from above 5 before the 90s to below 1 after 2000.

I have also separated biotech which is known to have startups going public with low revenue and the group of Software and Internet. The curves which follow are probably better illustrations. Quite striking!

I also looked at the profits (or losses) of the startups and computed the Profit to VC amount ratio. Here it is:

Biotech is different as companies were rarely profitable when going public and the ratio is quite stable since 1990. But overall, companies were profitable at IPO before 2000 (and sometimes highly profitable, so that I could not find a good axis scale for my figure). They are losing money since 2005 and apparently losing more and more.

All this is no real surprise. Mallaby in his recent book The Power Law has described the new trends in venture capital. Funds like Softbank Vision or Tiger Global are pouring tons of money in startups which try to capture market dominance, whatever the cost. So the capital productivity is decreasing at IPO with the hope of huge gains in the future. A very, very risky bet…

PS (dated April 22, 2022) : I was asked a question about startups in the energy / greentech field. This is indeed interesting. Couple of comments before providing an answer from my data. Greentech has never been a stable or profitable segment. Kleiner Perkins or Khosla Ventures, early entrants in the field, seem to have suffered a lot. In addition I have only 21 companies in my DB. You are right, it is stable but from the low range, with low sales to VC ratios and negative profits…

La question était : On a different note you have data only on Energy/green tech? what would you expect to see? I was wondering if for capex intensive businesses the trend is more weak as they already needed to raise a lot of capital.

The Return of Dark Humor in Russia

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When I noticed the article by French newspaper Le Monde En Russie, le retour de l’humour noir soviétique, I immediately remembered the great and funny book I had been offered in 2018. I probably should have also been concerned with this poisoned gift, ah ah ah!

I’m not going to praise it again but let you (re?)-discover the articles at the time
– Why was I offered that book? Humor and bureaucracy in June 2018.
– Humor and bureaucracy (part II) in October 2018.
I was not aware of the Wikipedia page on the topic, which also deserves to be read: Anecdotes.

I will conclude on this April 1st that apparently Russia has decided to give Leo Tolstoy’s War and Peace the new name of “Special Operation and High Treason”.

Mathematica by David Bessis – about logic and intuition

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“Mathematicians are the humans who advance human understanding of mathematics.” William P. Thurston

I had already mentioned David Bessis’ book, Mathematica, when the author appeared on France Culture. He had spoken of Grothendieck, but said above all that between logic and intuition, he gave more importance to the second to do mathematics. Go back to the article to find the interview link. I had the chance to read his very beautiful book in the recent days and the author is convincing. He explains quite well the failure of the teaching of mathematics which gives too much importance to the first.

No doubt it will be difficult to change the minds of skeptics, but the argument that there is no special talent or gift for doing mathematics but above all curiosity and perseverance, as for any activity that requires learning, is well illustrated in his book.

It is not a question of tricks that are used too often in the teaching of mathematics, which can make people less fond of the discipline. In the article on the Beauty of Mathematics, I wrongly and a little too much used this impression of magic. It is more a question of deep understanding of things, in the sense that we end up seeing them. The downside of math is that while music is heard, or a sport is physically visible, math is mostly made up of mental images.

He also talks (as I must have done if you follow the #mathematics hashtag) about proofs of the sum of the first natural numbers and Bessis is luminous when he explains that Gauss’ clever proof probably does not really allow to “understand” the solution:

while there are more intuitive approaches such as the use of triangles or distance from the mean. Read his pages 169 to 181, it is easy to understand why Thurston as a child first gave 5000 as an answer to the sum of the first 100 integers, then corrected himself to give the exact answer. The average of a random drawing of numbers between 1 and 100 is also not quite 50… (unlike that between 0 and 100) and there is a link between the two subjects.

I really liked the descriptions and portraits that Bessis makes of Descartes, Thurston, Grothendieck and the less famous Ben Underwood. Or the magnificent passages on Pierre Deligne and Jean-Pierre Serre. I hope to give you the desire to discover them.

It is a beautiful book to offer to anyone who wishes to discover or rediscover the beauty of mathematics. And perhaps more importantly, as the subtitle of the book indicates, an adventure in the heart of ourselves, Bessis shows that all explorations are above all a choice to overcome one’s fears, to accept the possibility of mistakes, and the possibility of a path to more self-confidence. A paradox is an advice that comes up often in his book: “You should never read math books”. Except this one! Superb!

The Power Law (part 5) – Sequoia Capital

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Sometimes I publish posts which may be unreadable, they might be more for myself, not for other readers. In a way, this blog is my second memory… so I am not sure this post is worth reading…

There have been two major venture capital firms in history. So important, I have created hashtags for them: Sequoia and Kleiner Perkins. So not surprisingly Mallaby covers them both in his great book, but in different manners. According to him, Kleiner Perkins (KP) has lost its leadership. Both Sequoia and KP were #1 and #2 from 1980 to 2005, but since, Sequoia has kept its ranking and KP is not even in the top 10 partnerships (see page 413). KP is covered in the last part of Chapter 11, with subtitle The decline of Kleiner Perkins. The full chapter 13 is entitled Sequoia’s strength in numbers.

Mallaby has a lot of convincing arguments, from the team strategy to the diversification of the firm activity: Sequoia has now large growth funds, a hedge fund, even an endowment, and a presence overseas in Israel, China, India and even recently in Europe. And Sequoia’s performance looks impressive: Taking all its U.S. venture investments between 2000 and 2014, the partnership generated an extraordinary multiple of 11.5x “net” – that is, after subtracting management fees and its share of the investment profits. In contrast the weighted average for venture funds in this period was less than 2x net. (Data from Burgiss). Nor was Sequoia’s achievement driven by a couple of outlandish flukes: if you took  the top three performers out of the sample, Sequoia U.S. venture multiple still weighed in at a formidable 6.1x net. Deploying the capital it raised in 2003, 2007 and 2010, Sequoia placed a grand total of 155 U.S. venture bets. Of these a remarkable 20 generated a net multiple of more than 10x and a profit of least $100M. (Proving it was not afraid of risks, Sequoia lost money on nearly half of these 155 venture bets.) The consistency across time, sectors, and investing was striking. “We’ve hired more than 200 outside money managers since I came here in 1989”, marveled the investment chief at a major university endowment. “Sequoia has been our number one performer by far”. [Page 320]

So I had a look at my own data. Here what I found about their fund history.

I also looked at my cap. table and found where Sequoia was an investor. When the data was available, I looked at how much the firm invested and what was the stake value at the IPO or acquisition. Indeed impressive.

PS (May 3rd, 2022): I just read a very interesting account of Mallaby’s book by Bill Janeway : The Forgotten Origins of Silicon Valley. Janeway likes the book and adds interesting criticism. Two points are not new, that is
– the role of government would be underestimated by Mallaby,
– East Coast VCs and the field of biotechnology are not analyzed well enough.
But a third point was newer to me: technology became open in the 70s and 80s (the PC, the operating systems, the networks including the internet) and this created huge opportunities for new companies. I have never been fully convinced by the first two points, motsly because the funding of research brings no guarantee to great innovations. But the third point is more intriging.

The Power Law and Venture Capital (part 4), China’s rise

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In the part 1 of my post about The Power Law, I had embedded my own visual history of venture capital. There was a missing element which is China’s rise, that Mallaby adresses in his 27-page Chapter 10. Before 2010, venture capital in China was behind Europe, but today it’s challenging the USA:


Source: Mallaby’s The Power Law, appendix, page 413.

Mallaby convincingly explains that it developed not with the support of, but bypassing the Chinese government and surprisingly thanks to a combination US venture capitalists and Chinese people who had been in close contact to the American entrepreneurial culture. I knew nobody from the people below but one entrepreneur (you can check their names at the end of the post).

I had heard about the BATX which are nowadays compared to the GAFA and I loved Jack Ma’s video which could have been given by many Silicon Valley entrepreneurs. Here it is again:

I had a few Chinese startups in my 800+ cap tables and they are mostly internet and ecommerce companies. Mallaby seems to have similar views. I extracted them all (see below) and here are a few interesting characteristics:

Not only are they mostly internet/ecommerce companies, but they are recent, went public quickly, their founders are younger than average, keep more equity than others, and they have many more founding CEOs than the average. Interesting…

Equity List China

In the image above are the:
Funders: Gary Rieschel (Qiming), Neil Shen (Sequoia China), JP Gan, Hans Tung (ex-Qiming), Kathy Xu (Capital Today), Syaru Shirley Lin (ex-Goldman Sachs)
Founders: Jack Ma, Richard Liu, Wang Xing

The Power Law and Venture Capital (part 3), planners and improvisers, betting big or diverse

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Mallaby is a marvelous storyteller – thanks to his team probably as he mentions at least 15 collaborators in his acknowledgments. This is part 3 of my posts about the Power Law, following part 2 and part 1.

You will discover so many figures of venture capital and entrepreneurship that it would be impossible to mention them all. But here are illustrations. If you do not know them, chek their names at the end.

What is really impressive in Mallaby’s book, is that whatever the strategy of the investors – for example being improvisers or planners, betting big or small in a small or large number of opportunities, replacing or mentoring the founders, the power law prevails.

As a side and unimportant comment, Mallaby is great at story-telling, he is less good with numbers. But valuations of startups can be tricky when you mix pre-money and post-money, dilution and stock options. Page 155-6 : “The founders tentatively suggested a valuation of $40million up from just $3million when Sequoia had invested eight months earlier. […] Son duly led Yahoo’s Series B financing providing more than half of the $5million […] In a bid without precedent in the history of Silicon Valley, he proposed to invest fully $100million in Yahoo. In return he wanted an additional 30 percent of the company. Son’s bid implied that Yahoo’s value had shot up eight times since his investment four months earlier.” I am not sure all this is correct. I let you check. Or page 147 : “Rather than merely doubling in power every two years, as semiconductor did, the value of a network would rise as the square of the number of users. Progress would thus be quadratic rather than merely exponential; something that keeps on squaring will soon grow a lot faster than something that keeps on doubling.” As Etienne Klein has often said, the “exponential function” is heavily mistreated in the media and now abusively assimilated to a function whose only characteristic is to grow very quickly…

The founders:
Nolan Bushnell, Jimmy Treybig, Bob Swanson, Sandy Lerner, Bob Metcalfe, Mitch Kapor, Jerry Kaplan,
Rick Adams, Marc Andreessen, Jerry Yang, Pierre Omidyar, Larry Page, Mark Zuckerberg, Max Levchin, Elon Musk.

The funders:
Don Valentine, Mike Moritz (Sequoia), Tom Perkins, John Doerr (KP), Jim Swartz, Arthur Patterson (Accel),
Bill Draper, Masayoshi Son (Softbank), Bruce Dunlevie, Bob Kagle (Benchmark), Peter Thiel, Paul Graham.

The Power Law and Venture Capital (part 2) Fairchild and Rock

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Following my previous post about the book The Power Law and Venture Capital, I can only confirm it is a fascinating book about the history of Venture Capital. I have now read chapters 2 & 3 which covers the sixties mainly through Arthur Rock and his funding of Fairchild and the Traitorous Eight.

About Fairchild

Coyle pulled out crisp dollar bills and proposed that every man present should sign each one. The bills would be “their contracts with each other,” Coyle said. It was a premonition of the trust-based contracts – seemingly informal, yet founded, literally, on money – that were to mark the Valley in the years to come. [Page 35]


Source : https://www.sfgate.com/business/article/Tracing-Silicon-Valley-s-roots-2520298.php

Each of the 8 founders put $500 for 100 shares ($500 was two to three weeks of salary), Hayden Stone (through Rock and Coyle) 225 shares at the same price per share and 300 reserved for future managers. Fairchild put $1.4M as a loan to be compared to the initial $5,125, with an option to buy all the stock for $3M. It happened making the founders rich but not as rich as if there had not been that option. Fairchild had made a profit of $2M at the time of acquisition and price to earnings were easily 20x to 30x. SO I had to do my usual cap. table from foundation to exit. Here it is:

What VCs such as Rock looked for

I just scanned pages 48-49 and this is very similar to what you could find in slideshare slides in the previous post.

“Some winning venture capitalists claim to look almost exclusively at the backgrounds and personalities of the founders; others focus mostly on the technology involved and the market opportunity the venture addresses” from The New Venturers, Wilson (1984)

“They look for outstanding people without worrying too much about the details of product and marketing strategy. The right people have integrity, motivation, market orientation, technical capability, accounting capability and leadership. The most important is motivation.
Rock’s style was supportive of entrepreneurs with an implacable will.” from Wilson (1984)

In 7 years, the Davis & Rock $3.4M fund would return $77M or a 22.6x multiple… [Page 50].

If you do not fully understand what I talk about read Mallaby! And of course watch Something Ventured.

The Power Law and Venture Capital – according to Sebastian Mallaby

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Sebastian Mallaby has just published a new book about Venture Capital which looks very interesting. I have already explained here what the Power Law is and will not do it again. But I will quote Mallaby as I do when I read good books.

About the term : “Venture capital” had also cropped up in 1938 when Lammont du Pont, the president of E. I. du Pont de Nemours & Company spoke before the US Senate Committee to Investigate Unemployment and Relief. “By Venture Capital I mean that capital which will go into an enterprise and not expect an immediate return, but will take its chances on getting an ultimate return” du Pont clarified. […] but this phrase making did not stick and the term was not widely used until at least the 60s. [Note 28 page 418]

And what about this : “All progress depends upon the unreasonable man, the creatively maladjusted. Most people think improbable ideas are unimportant, but the only thing that’s important is something that’s improbable”. From Vinod Khosla [Page 3]

About the return of VC. The normal distribution applies to size, weight of individuals, traditional stock markets, but the power law applies to the exceptional – wealth of individuals when not really regulated, as well as venture capital: Like the 7-foot NBA star, unexpected large price jumps are rare enough and moderate enough that they do not affect the average. The S&P500 budged less than 3% in 7763 days out of 7817 between 1985 and 2015, that is 98% of the time. […] Now consider venture capital. Hosley Bridge is an investment company which had stakes in venture funds that backed 7,000 startups between 1985 and 2014. A small subset of these deals, accounting for just 5% of the capital deployed generated fully 60 percent of all the Hosley Bridge returns. [Page 8]

Examples of Khosla’s deals [Page 10]

Startup Investment Return Multiple
Juniper Networks $5M $7B 1,400
Siara A few $M $1,5B >150
Cerent $8M Bought for $7B

About predictions: The revolutions that will matter – the big disruptions that create wealth for inventors [and investors! HL note] and anxiety for workers, or that scramble the geopolitical balance and alter human relations – cannot be predicted based on extrapolations of past data, precisely because such revolutions are so thoroughly disruptive. Rather, they will emerge as a result of forces that are too complex to forecast – from the primordial soup of tinkerers and hackers and hubristic dreamers – and all you can know is that the world in ten years will be excitingly different. […] the future can be discovered by means of iterative, venture-backed experiments. It cannot be predicted. [Page 11] “I always tell my CEOs, don’t plan. Keep testing the assumptions and iterating” Khosla again. [Note 32, page 416] All this of course reminds me also about the Black Swan.

Why is venture capital so different from other sources of finance? Most financiers allocate scarce capital based on quantitative analysis. venture capitalists meet people, charm people, and seldom bother with spreadsheets [*]. Most financiers value companies by projecting their cash flows. Venture capitalists frequently back startups before they have cash flows to analyze. Other financiers trade millions of dollars of paper assets in the blink of an eye. Venture capitalists take relatively small stakes in real companies and hold them. Most fundamentally, other financiers extrapolate trends from the past, disregarding the risk of extreme “tail” events. Venture capitalists look for radical departures from the past. Tail events are all they care about. [Page 14]

[*] Academic survey work confirms that one in five venture capitalists do not even attempt to forecast cash flows when making an investment decision. [Note 36 page 416]

All this is from the introductory chapter only and I liked it very much. Maybe more soon but in the mean time, you can always have a look at my visual history of venture capital.

Exclusive license vs. ownership of Intellectual Property

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Intellectual Property (IP) is a sensitive and often cleaving topic. I have already addressed the topic here, check the hashstag #intellectual-preperty (or also #licensing). But even once the general value of IP is addressed, there are tons of secondary issues.

One is the specific question of how ownership of IP by a startup vs. an exclusive license granted by an academic institution is considered, in particular by investors. On January 27, 2022, I send an short email to 300+ investors and I got about a 10% response rate. In parallel, I mentioned the topic on my LinkedIn account and I got additional comments. Although, there is a rich argumentation about pros and cons of both situations, so that the reader may want to have a careful look at the full answers, here is my synthetic understanding:

There is no fundamental difference between license and transfer from the point of view of the startup’s strategy, except what happens in the event of bankruptcy or liquidation. The license is not an asset and therefore the intellectual property is no longer usable. With this nuance, admittedly significant, there are two additional points:
– Some investors think that the owner pays for the maintenance of the IP and suits the possible “infringers” to defend this property. I don’t think that’s the case because in my experience it’s the licensee who does that.
– In case of a trade sale, it is important that the license can be transmitted and this is a major item, that is to be guaranteed. There maybe political or strategic issues though.
Finally, a price for the transfer may be added when or if possible.
There is no doubt that the reputation of the institution and the stability of these acts are essential. (There would be more to add like equity vs. (capped or not) royalties in the license terms, milestones and many details… I tried to be as short as possible).

You can download here pdf file Survey on license vs ownership of IP.

Survey on license vs ownership of IP – Lebret – 1Feb2022

Time and Space Maps of Silicon Valley (in the 80s)

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I had published in the past genealogies (time maps) of Silicon Valley startups and venture capital. Here they are again:

SiliconValleyGenealogy-All
Genealogy of Silicon Valley startups (1957-1986)

WCVCGenealogy-All
Genealogy of West Coast Venture Capital (1958-1983)

But there have been other (“artistic”) maps, strangely in the 80s also. Here are three similar versions from 1983-1986.


Maps of Silicon Valley by Pacific Ventures (1983-86)

Of course these ones have a background history with Steinberg’s New Yorker cover in March 76. And for my Swiss friends what about this Zuricher one?

What is interesting to me is its nostalgic value. So what names are worth noticing? On the left one or below, of course, Apple, Intel HP, IBM but also Tandem, National Semi, Varian, Fairchild, Ask, and a little surprisingly Stanford University, all in between highways 101 and 280, finally Genentech, Atari, Rolm between San Jose and San Francisco and behind the Bay Area, Berkeley, New York, technology clusters Route 128 in Boston, Research Triangle in North Carolina & Austin’s Silicon Gulch. Finally emerging and threatening Japan in the mid 80s…

What to add to the one in 1984? Not much except that both HP and Intel, but not IBM anymore, are in the foreground… Do you remember the Apple vs. IBM 1984 advertising?

So what about 1986? Well I see 3com, Borland, Sun, Silicon Graphics. Silicon Graphics went public in October 1986, Sun on March 4, 1986 (by the way Oracle had gone public on March 12, 1986 and Microsoft on March 13, 1986…). 3Com’s IPO was in 1984. Borland was always strangely structured with an IPO in London in 1986 before doing it in the USA in 1989. 1986 is a bit of a turning point: software became an industry in itself, Sun, Silicon Graphics, 3Com represent also the beginning of networked computers.

Forget nostalgia. Silicon Valley has changed a lot. Apple is still around, Oracle too but have a look at this new illustration! Apple is in a new building. Facebook (sorry Meta) and Google (sorry Alphabet) are the new giants. HP is also mentioned through its garage! There are the old ones (Intel, AMD, IBM, HP), the already old like Yahoo, not to forget Cisco, Adobe, YouTube, LinkedIn, Intuit and more “iconic” landmarks like Sand Hill Road, or Cafe Borrone and Buck’s restaurant.

But always remember. Silicon Valley is not about buildings as Folon rightly showed. And you know what, it is dated 1985…