[davemthrowaway]

The (deleted) comment that I was responding to referenced the new England patriots as an investment strategy.

Do you actually think the patriots and nfl draft picks have more to offer a discussion of venture strategies than the concepts of equity investing and portfolio management which are common to many institutional investors?

As another commenter pointed out, 1000x variations in returns actually happen in venture investments, they don't happen in sports.

[001sky]

Understood, the parent comment is deleted. Also, understood the gist of what you are saying. But the words, as they are written, as a counter argument fail. And by that, I mean his over-broad statement you are replacing with another overbroad statement. What is left, lacks the resolution to differentiate. There is no insight into what makes a good X.

One thing that does make a good X is talent scouting, and being a mentor to a professional going through a rapid growth/maturity curve. There is an art to finding talent and building relationships. There is an art to segueing those relatinships to finding the right fit for talent Z within the developmet system. Art dealers or A&R reps have similar dynamics, its not particular to sport.

So, while this was latent information, it is much more powerful and interesting to determinig the performance of X than your proposed alternate formulation ("think of them as [...]"). The baby goes out with the bathwater.

Institutional investors as a class are not expert at all in this. Institutional investors as a class talent spot from 3-5 top MBA programs. Institutional investors as a class know about working in the system. They may or may not know shit about running a company, disrupting the system, shoestring budget, etc. In general, VCs are not like Institutional Investors as a class. The parts that are similar are hidden from the day to day workings of the founders, etc.

Where you do have merit, however, is in benchmarking perfomance returns. In that case, IIs as a class are relevant. So, ignoring how you generate returns. How big do they need to be to propogate the Firm? You can measure that. But in reality, This is just a threshold metric. Theres not much insight to this. Its not the feasible upper bound if you are studying that, etc. 20% after everything annualized? GTG.

Though in context here, this is not totally irrelevant. So in maths, you might say...how many 10,000x do I need if threshold is only 1.2^n? Etc. Its not clear only one strategy is either feasible or optimal, etc.

But: a strategy can be set in theory to reach 1.2^n.

How do you know the probability of achieving it? If you don't understand the interdynamics of the strategy with the day to day of what makes a good X and what I can execute on as X at threshold probability...you're in trouble. And if you don't know what makes a good X...thats a problem.

And so combine: Path X and Prob X = expected return.

So, to understand Vc you need to understand this problem. PGs post talked alot about this. What is the path and what is the probability to sucess. What do those data look like? what are the hurdles? What are the characteristics of the athletes, etc.

[And for the avoidance of doubt, this is not an opinion on any one strategy or the other, or which of the essays was better, etc. This is how to think about frameworks with enough resolution to be useful for thinking clearly].

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[davemthrowaway]

In view of your comment I regret using the term institutional, I think that really means much larger investors. A quick Wikipedia check shows that technically venture is actually a subset of private equity.

What I should have said is: try to think of vcs as investors with a mandate to invest in a specific asset class.

Talking about venture capitalists within the context of what they actually are, rather than stretching athletic metaphors adds a lot of clarity to the discussion. It actually fits quite well with the art dealers and a&r guys you mentioned. Both of them are (basically) investors in a very specific asset class. Each of those asset classes has unique qualities and each of those investors can add value in unique ways.

Lastly, I think you are genuinely trying to contribute and I concede that I may just be ignorant; however, your approach to commenting doesn't make it very clear what you are trying to say. I would suggest that you dial down the complexity of your writing and reduce your use of equations/ variables when words and sentences would do.

[001sky]

A quick Wikipedia check shows that technically venture is actually a subset of private equity...Vcs as investors with a mandate to invest in a specific asset class

A more pointed critique is that these are too simple definitions. Its like saying a student is a person that goes to school. Its the same idea as before at reduced scale.[1] They are threshold definitions.

The point of PGs swans and DM's article here: what is the environment for investing and what are the dynamics of gameplay.

If you want to talk about portfolio theory etc fine. But the conventional wisdom is for all VC's: it's better to copy the <strategy> of the winners and differentiate on the <execution>. Arguably, DM is saying the opposite: we cant compete on the <execution>, so we'll differentiate on the <strategy>.

On the aside, I appreciate the note. I won't overexplain myself here.

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[1] see: http://lesswrong.com/lw/e95/the_worst_argument_in_the_world/