The "Babe Ruth" effect of VC industry

Editor's note: The normal distribution and power rule for ROI we have seen Peter Thiel from 0 to 1, but what about the "Babe Ruth" effect? What kind of revelation does it give to our entrepreneurs and VCs? Please see what Cdixon in his latest article, in which the Chinese version is compiled by the Heaven Zhuhai Branch Rudder.

"How to play a home run: I will use the full 12 of my skill to swing, just like the baseball to penetrate the same ... The more you hold the bat, the more you hit the ball and the farther the ball will fly. When I ran out of the power of my breast, I was likely to hit hard, and there was a big possibility that the three strikes were out. "– Babe Ruth

As we all know, those who have just engaged in the VC industry, one of the most difficult problems encountered is how to Babe Ruth the concept of "the effect of the".

If you want to have a high return on investment for all your portfolios, you must apply an accurate assessment approach to each of these investments. But surprisingly, the leaders of the more advanced industries, including gamblers, casinos, and investments, are stressing the other side, which the investment bank calls the "Babe Ruth Effect": Although Babe Ruth (the excellent VC) has experienced a lot of three strikes (failed/lost investments), But that does not prevent him from becoming one of the greatest hitters in history. – From the "Babe Ruth Effect: frequency and magnitude"

The Babe Ruth effect will be met in different types of investments, but in the VC industry is particularly significant. As noted by investor Peter Thiel:

In fact [VCs] the rate of return is very serious skewed distribution. A VC on this partial distribution of the deeper cognition, he will be a good VC. The bad VC is inclined to think that the return curve is a normal distribution, for example, mistakenly believe that all companies are born under the same conditions, but some eventually do die, some are dead, and some are growing up just. In fact, they follow the distribution of the power law (more about Peter Thiel's description of the power law and the normal distribution, please check out a post on my website, "The Startup Bible, from 0 to 1," a concise version of reading notes).

The reason why the Babe Ruth effect is so difficult to be internal is mainly because people tend to avoid losses psychologically. Behavioral economics has long been a well-known demonstration of the degree to which people feel depressed about a certain amount of money, far greater than the amount of emotion they earn. Losses are always uncomfortable, even if the loss is only a small part of a successful portfolio strategy.

When people talk about this topic, it is often difficult to go deep, because it is difficult to get a comprehensive and effective VC company's effectiveness data. And today, we're all lucky, thanks to Horsley Bridge, a valued investor in many VC companies, who gave me anonymous historical data about the ROI of these hundreds of VCs since 1985.

The payoff, as we expect, is very concentrated: about 6% of all of these companies ' portfolios (about 4.5% of all investment), and the resulting return on investment is about 60 of the total return on investment. Let's dig deeper into these data and see how good VC and bad VC are differentiated.

all -you-play (Editor's note: This means that many of the VC's portfolios are earning over 10 times times the ROI): As we have expected, successful VC companies have more "home run" levels of investment.

(in all the charts in this paper, the x-axis refers to the VC fund benefits: On the right of the representative of the excellent VC fund, on the left to represent the bad VC fund.) )

Outstanding VCs will not only have more high ROI portfolios, but the return on investment of these portfolios is often higher than expected. Please take a fancy to describe the difference in the ROI of low-cost and high-efficiency VC funds in situations where all are home run (over 10 times times the ROI).

Usually good VC funds have a return on investment of about 20 times times, while excellent VC funds have a 70 times-fold return on investment, as Bill Curley once said: "VCs is not just a home run business, it's a big full-blown business." “

three strikes. (Failed investment): Here the y-axis represents a percentage of the losses in the investment portfolio of a VC fund.

It can be learned that in fact, both bad investment companies and excellent investment companies, their portfolios are a lot of losses. So the wind investment banking industry itself is a high-risk business.

You can see that it is a U-shaped distribution, that is, the superior VC companies in fact than the ordinary (in the middle of the chart) VC companies are more likely to invest in the loss of the company. So here is the excellent venture capital fund company just confirmed the above mentioned "Babe Ruth Effect" effect: their swing (investment), the greater the strength, it is possible to hit hard, there may be three strikes (loss). But if you don't risk a lot of three strikes (failure), you can't have the possibility of a grand slam (a lot of investment returns without many times). For example, according to the power law, if you have a Facebook-like company in many of your portfolios, even if all of your other portfolios are losing money, you will still earn a full amount!

Reminder : More articles please pay attention to the public number:Techgogogo or official website www.techgogogo.com. Of course, you are also very welcome to pick up directly (zhubaitian1).
This work uses [Creative Commons Attribution 3.0 China Edition license], welcome reprint, please keep the public number and other information when reproduced

The "Babe Ruth" effect of VC industry