Nik Bedi

I find the smartest humans in overlooked countries | Part-Time Tech Investor 🇨🇦

[Nik Bedi @NikBedi_]

Canadian VCs - Are our errors of omission killing the start-up ecosystem?

There are two errors in venture capital: the error of omission and the error of commission.

Error of commission: investing in a company that doesn't work out.
Error of omission: missing the company that becomes great.

Marc Andreessen, co-founder of a16z, worries much more about the second one. Why?

The Math

What's the most you lose on a company that doesn't work out? 1x.

What's the most you lose by missing one that does? Cursor was 1000x+ from the pre-seed round. Hugging Face, about 600x from seed. Stripe, roughly 1000x on YC's cheque.

Each one of these companies returned their earliest investors' funds multiple times over. You could have an error of commission on most other companies in that portfolio and it wouldn't matter. That fund was a winner.

So if I'm writing pre-seed, seed, or first cheques, what should I actually be worried about: minimizing failures, or missing a winner?

Do we overestimate our ability to pick winners?

Now let me add the next layer of complexity. The most successful tech companies today barely looked like winners when they started.

Airbnb looked like a bad idea. Figma and Stripe had no customer traction for multiple years. Cursor and Slack both ended up as completely different businesses than the ones they set out to build. SpaceX, Amazon and Nvidia made their real money somewhere other than where they started. Pick almost any large tech company and you'll find some version of this.

So is doing "disciplined" and "deep" diligence to predict winners at the earliest stage a useful activity at all? The only constant in winning companies is the founders. But assessing people isn't a science either.

When I look at this objectively, I feel humbled about my capability to pick winners at the earliest stages. Do you?

What do I think is the optimal strategy

In my mind then, the optimal investing strategy at the earliest stages starts to look different. Weed out the people who are obvious no's to you (keyword: you, and you're still going to be wrong), and write the same disciplined cheque into everyone else. Maximize shots on goal.

The most obvious example of a fund pursuing this strategy and killing it is YC. They invest in 400+ companies a year, off a 20-minute application and a 10-minute interview.

I highly recommend spending an afternoon calculating returns on their first four funds from public sources, the ones with fully realized returns, and you'll be humbled. Even if you're a top quartile VC.

My estimate: YC hit double digit DPI across most of those funds, and I wouldn't be shocked if the first $2M hit triple digit DPI.

Carta's data points the same way. A simulation of 20,000 fund outcomes, compiled by Dan Gray of Equidam, put a diversified fund (100 companies at $0.4M each) against a concentrated one (20 companies at $2M each). The diversified fund had a median multiple of 2.5x against 1.9x. It returned capital in 99.7% of runs against 81.9%. It got to 2x in 77% of runs against 47%.

The only place the concentrated fund wins is the 95th percentile outcome, 4.8x against 4.0x. So unless we're top 5% funds, diversified is the better strategy.

Is this the reason behind Canada's woes?

In Canada, we're far from the top 5%. At least that's what it seems like.

The only public data I could find on Canadian VC performance came from VCAP's 2013 vintage at 1.76x TVPI and 0.56x DPI, and VCCI's 2017 vintage at 1.25x TVPI and 0.19x DPI. And based on anecdotal evidence that most VC in Canada is government backed, this data might actually be a true representation of our ecosystem.

Just looking at this data, it seems like something is not working with our current strategy.

I don't know the definitive answer to what's the right strategy, but here's a few questions I'm asking myself:

- In an ecosystem as small as Canada's, if most early stage funds run the concentrated strategy (which I think most of them do), are we really taking enough shots on goal as an ecosystem?

- If we're not taking enough shots on goal as an ecosystem, is it possible that this is what is going to kill the next Cursor, or worse, push the founders to go south?

- Could this mean that our collective error of omission is killing our fund returns, and our start-up ecosystem?

[Nik Bedi @NikBedi_]

@nectarios Couldn’t agree more

[Nik Bedi @NikBedi_]

@pumpkin_oranges @GinnyRothTO Israel does!

[Nik Bedi @NikBedi_]

@PHfloor I see lots of great ideas. Funding to get them started is the problem.

[Nik Bedi @NikBedi_]

@junaidbuilds We’ve got a $25M fund and we’ve already funded 8 this year. Happy to come to your event.

[Nik Bedi @NikBedi_]

@AaronAnandji @nectarios @chrislevan24 No one talked about yeeting money around. But the US has tonnes more angels that actually invest early and help get companies started. In addition to that you have YC, SPC, Afore etc etc etc

[Nik Bedi @NikBedi_]

@ashkan Exactly the kind of thinking we need to change. Doesn’t help if we just accept status quo.

[Nik Bedi @NikBedi_]

@nectarios Have heard great things about Panache, but are you investing pre-traction @chrislevan24?

My thesis with a first check fund would be to write smaller checks ($100k - $150k) into high quality folks right when they’re just starting the company or even thinking about it.

[Nik Bedi @NikBedi_]

@NickAbraham12 Do you measure meetings-to-close rate?

[Nik Bedi @NikBedi_]

@AkshayiWeb @NWischoff (2/2) Step 3: If you can’t find warm pathways, get really really good at writing cold emails to one of the Partners.

It’s also a numbers game. Do the above things really well over 100 times and you should get results

[Nik Bedi @NikBedi_]

@AkshayiWeb @NWischoff You’ve got to find the right investor for you!

[Suhail @Suhail]

Good morning. Just build your god damn company.