What’s the best way to understand investor behavior?

Paul Graham (Co-Founder & Partner at Y Combinator)
Default Alive or Default Dead?

Kill-or-cure strategies are optimal for VCs because they’re protected by the portfolio effect. VCs want to blow you up, in one sense of the phrase or the other. But as a founder your incentives are different. You want above all to survive.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Fund Level Vs Deal By Deal Carry – AVC

Deal by deal carry has not been common in the VC business. It is more common in private equity where the distribution of outcomes looks very differently. But with the rise of syndicates being raised on venture capital marketplaces, we are seeing an increasing number of angel and early stage investors who have deal by deal carry.
As I said, there are pros and cons to both compensation models. I don’t want to say that one is better than the other…. (read more)

David Jackson (Founder, Seeking Alpha)
Conflicts of interest between startups and VCs | A Founder’s Notebook

I’ve been lucky to have superb VCs invest in Seeking Alpha. One of the things that’s helped me to maximize my relationship with them is understanding when our interests diverge. Here are two examples: It’s in their interest to push their portfolio companies to swing for the fences, even if that means raising the risk of failure. VCs rightly care about their brand, which is strongly impacted by association with successful companies with “buzz”.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
The Difference Between Large Funds and Small Funds – AVC

I have always been a “small fund” oriented investor. Both models work if executed well, but they are different.
With small funds, you only need to find a few good ideas a year to get behind. That is true in hedge funds, private equity, venture capital, and probably many other asset classes.
With large funds, you need to get behind every good idea every year.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
VC Fund Economics – AVC

That is 2.5% in annual management fees and 20% of the profits after the investors get their capital back. That is the exact same set of economics the USV operates on. The goal of VC fund economics is to incent the partners to focus on carry and not on current cash compensation. That means that we are focused on generating large gains on our investments and that aligns us well with the entrepreneurs we back and the investors who provide us with c… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Loss Ratios In Early Stage VC – AVC

When I was early in my career, I casually mentioned to an older VC that I had yet to lose money on an investment. He replied “that’s not good, you aren’t taking enough risk.” I have gone on to lose a lot of money over the years. And made a fair bit too.
So one of the things I like to look at when I look at our funds and other VC funds that I am an investor in are loss ratios. You can calculate loss ratios by “names” meaning how many investments … (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
The Role Of Personal Chemistry In Investment Selection – AVC

Venture capital investing is not like angel investing or public stock investing. We don’t make a lot of small bets (angel investing) and we can’t easily get in and out of our positions (public market investing). We make big concentrated bets in a handful of carefully selected companies and hold these positions for between five and ten years on average. We sit on the boards of these companies and become business partners with the founders and mana… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
The Power Of Diversification – AVC

When you are an investor, there are days when some of your investments are doing great and some are doing badly. If you are broadly diversified, those days are easier to take. If you are all in on one investment, then those days are brutal. Entrepreneurs go all in and are rewarded accordingly when they hit it. Investors should not go all in. They should be diversified.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
The Grind – AVC

I started yesterday at 8am with a breakfast meeting. I ended around 8:15pm when I wrapped up a pitch meeting in my office. In between those two meetings I did ten other meetings for a total of twelve meetings in a bit more than twelve hours.
Of those twelve meetings, one was a three hour board meeting, one was a breakfast meeting with another venture investor, one was a lunch meeting to talk about CS Ed in NYC, four were pitch meetings, one was … (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Qualified Small Business Stock – AVC

For the past twenty years, the US federal tax code has included provisions that allow startup investors to get favorable tax treatment on the capital gains they earn on early stage investments. These provisions are in Sections 1202 and Sections 1045 of the tax code. Sec 1045 allows a “tax-free rollover” which means that you can avoid paying the capital gains tax if the gain is “rolled over” meaning invested back into another QSSB. Sec 1202 allow… (read more)