VC Masterclass Double Feature
How Much Should You Bet To Maximize Your Investments, or Your Company's Odds of Success?
Tomasz Tunguz is a partner at Redpoint Ventures
Tunguz gives us a refresher on the Kelly criterion, named after John Kelly, a researcher at Bell Labs. The principle has two goals:
- Avoid total loss: The investment strategy should never result in a 0 or negative balance.
- Grow the value of the investment as quickly as possible.
First, this requires abandoning the arithmetic mean for its geometric equivalent. An example: Three equally likely investment opportunities have expected returns of 100%, 50%, and 0%. The arithmetic mean, and thus expected value, is 50%: (100+50+0)/3. The geometric mean is 0% (the cubic root of the three percent multiplied together). The Kelly principle says not to invest, while a normal average would say the opposite.
Second, the Kelly criterion tells investors how much to invest. This is expressed as KC = W - (1-W)/R — the probability of winning (W) minus the probability of losing (1-W), divided by the win/loss ratio (R). Investors tend to overestimate their chance of success, meaning that they bet half or three-quarters of the criterion. As this runs the risk of bankruptcy, it is always better to remain conservative.
It’s Just Better If Your VCs All Trust Each Other
Jason Lemkin is the founder of the firm SaaStr
Since Lemkin started investing in 2013, he has noticed that one key rule for founders, if they want to win, is to avoid building a VC syndicate where at least two parties do not trust each other.
Breaking this rule can lead to the following:
- Alignment in future rounds will be impossible to build unless the startup is a rocketship that buries all antagonism. This will make closing the round more difficult.
- VCs that have differing opinions on burn rates will provide conflicting advice, making a founder’s job harder.
- Table games, such as firms secretly trying to buy out ex-employees or other investors out at love prices, will proliferate. While not fatal, this can lead to lawsuits.
- If the board and investors have no way of de-escalating, issues will simply not get resolved. When lines of communication are present, most issues can be easily talked through, as they tend to not be anything new anyway.
To improve trust:
- Founders should meet with the late-stage investors that early investors recommend, even if no deals are made.
- Founders need to make room for pro-rata and existing investors in future rounds, even if not 100% participate, and be aware of the trade-offs of bringing new investors on board. A ‘sharp elbow’ round, where existing investors are not consulted, will immediately result in broken trust.
- Investors who do not even reach out to current investors are to be avoided. Those who are looking to play on a team will make this courtesy call.
- Board meetings should include invitations for all investors, not just one big investor.
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Today's Funding 💸
- Reprise (Boston, Mass.), software demo platform for enterprise sales and marketing teams: $17M A led by Bain Capital Ventures.
- Veylinx (Amsterdam, Netherlands), behavioral insights platform for consumer purchasing: $2M Pre-A from Dutch Founders Fund, Hidde Hoogcarspel, Laurens Groenendijk, Patrick Kerssemakers, Saeed Younesi, Robbert Flipsen, Mitch Barns, Anouar El Haji, Hein Willemse, Adil Naimi.
- YBVR (San Jose, Calif.), 360-degree streaming video platform: $1.5M Pre-A from Verizon Ventures, Telefonica’s Wayra, Tech Coast Angels.
- Evox Therapeutics (Oxford, U.K.), exosome therapeutics: $96.5M (£69M) C led by Redmile Group, participation from OrbiMed, Invus, Oxford Sciences Innovation, GV, Cowen Healthcare Investments.
- Eden Health (New York, N.Y.), national medical practice: $60M C led by Insight Partners, participation from Amigos Health, Aspect Ventures, Company Ventures, Flare Capital, Flexcap Ventures, Max Ventures, PJC.
- AcuSurgical (Montpellier, France), robotic microsurgery platform: $7M A from Mérieux Equity Partners, Supernova Invest, Sofimac Innovation, IRDI Capital Investissement.
- Rx Redefine (Oakland, Calif.), prescription ordering platform for physicians: $2M Seed led by Silverton Partners, participation from Saturn Five.
- Sphere (Hoboken, N.J.), cybersecurity platform to access governance across data, platforms, and applications: $10M A led by ForgePoint Capital, participation from Omkhar Arasaratnam, et al.
- Census (San Francisco, Calif.), customer data/data warehouse sync platform: $16M A led by Sequoia Capital, participation from Andreessen Horowitz, et al.
- Sentry (San Francisco, Calif.), application monitoring platform: $60M D led by Accel, participation from New Enterprise Associates, BONND. The company was valued at $1B.
- Descomplica (Brazil), online test-prep platform: $83M (450M reais) led by Softbank Group.
- Photomath (Sam Mateo, Calif.), math learning app: $23M B led by Menlo Ventures, participation from GSV Ventures, Learn Capital, Cherubic Ventures, Goodwater Capital.
- Leverage Edu (Delhi, India), platform helping Indian students secure places at foreign universities: $6.5M A from Blume Ventures, DSG Consumer Partners.
- Abound (New York, N.Y.), wholesale B2B marketplace for up-and-coming brands: $22.9M led by Left Lane Capital, participation from RiverPark Ventures, All Iron Ventures, Red Antler.
- Grip (London, U.K.), market engagement platform: $13M A led by Kennet Partners.
- Torii (San Francisco, Calif.), SaaS bloat management platform: $10M A led by Wing Venture Capital, participation from Entree Capital, Global Founders Capital, Scopus Ventures, Uncork Capital.
- RocketRez (Manitoba, Canada), cloud-based management software for large tours and attractions: $8.4M from Blueprint Equity, et al.
- Pipe17 (Seattle, Wash.), connected infrastructure provider for e-commerce: $8M led by GLP Capital Partners.
- Magical (Tel Aviv, Israel), team collaboration tool to replace the calendar: $3.3M led by Resolute Ventures, participation from Ibex Investors, Aviv Growth Partners, ORR Partners, Homeward Ventures, Fusion LA.
- Varo Bank (San Francisco, Calif.), all-digital nationally chartered bank: $63M led by Russell Westbrook.
- eFuse (Columbus, Ohio), networking platform for gamers: $6M led by Ohio Innovation Fund.
- KindHealth (Austin, Texas), full health insurance marketplace: $4M from undisclosed sources.
- Insurely (Stockholm, Sweden), open insurance platform: $3M (€2.5M) led by Luminar Ventures.
- Shiprocket (India), e-commerce shipping platform: $27M C led by Tribe Capital, participation from March Capital.
- Knock (Seattle, Wash.), tool suite for property management companies: $20M led by Fifth Wall Ventures, participation from Madrona Venture Group, Lead Edge Capital, Second Avenue Partners, Seven Peaks Ventures.
- Recogni (San Jose, Calif.), AI vision cognition system for autonomous vehicles: $48.9M B led by WRVI Capital, participation from Mayfield Fund, Continental, Robert Bosch Venture Capital, GreatPoint Ventures, Toyota AI Ventures, BMW i Ventures, Fluxunit – OSRAM Ventures, DNS Capital.
- VOGO (Bengaluru, India), two-wheeler rental service: $11.5M C from Lightrock, Kalaari, Matrix Partners, Stellaris Venture Partners.
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