Here is a article one of our portfolio founders, Jacob from Vinter.co wrote. Definitely worth to read
In his Medium post, Matt H. Lerner, founder of Startup Core Strengths, considers the
calculations behind risk and return in venture capital. Using a Monte Carlo simulation, he
finds that ceteris paribus, a larger portfolio yields markedly better return multiples than
This is chiefly due to the power law characterizing VC returns, which implies that a small
number of portfolio companies bring in a large portion of total returns. Simply put, the
more companies you have, the more likely it is that you find an outlier that ends up
becoming a unicorn and yields a gargantuan multiple.
Of course, VCs do not choose their firms randomly, and some of the top ones highly
benefit from their brand and connections which certainly boost the probability of success
for all of their respective portfolio companies. The above still holds true, and we at Gorilla
Capital have since 2012 been vocal advocates of the large portfolio approach.
The diversification benefits from having 70+ active companies in total in our Funds I & II
mean that our success is actually not even contingent on finding the occasional unicorn.
Instead, the bulk of the solid returns is generated from a large number of successful,
earlier-stage exits. However, should a portfolio company show potential to reach a billioneuro IPO, we certainly support them on their path – our approach doesn’t force any
artificial ceiling on companies.
There are some understandable reasons behind LPs preferring managers that practice
unicorn-hunting over this more sensible strategy. First, venture capital is seen as an asset
class with a high level of risk correlated with a high level of reward. LPs might feel as
though they can get solid returns with a sounder risk level from other assets. Second, the
irrational optimism characterizing the entire venture capital industry is strongly present
when funds are pitching to LPs: the dramatic, emotional and overoptimistic style often
entices more than a more cynical one.
At Gorilla, our mission is thus to show that a larger portfolio size of companies is also able
to generate sizeable returns for investors. We are essentially hedging our downside
without limiting our upside in the slightest. The success of our previous funds applying
this strategy serves as empirical proof: the general VC wisdom of unicorn-hunting can and
should be challenged.
A Tale of Two Squirrels: The Not So Simple Math on Venture Portfolio Size:
In his article for Soaked by Slush, Christian Owens, co-founder and CEO of the scaleup
Paddle raises the concern that the metrics currently used to quantify European tech
success are due for a change. The overemphasis on unicorns leads to a tunnel vision in
which only the gigantic exits are valued, and the numerous smaller ones neglected.
The author argues that the overall health of the European startup ecosystem rests on the
hundreds and thousands of small businesses becoming successful and scaling up only
when solid foundations are built, instead of seeking aggressive growth via big funding
Our team at Gorilla Capital fully endorses this view. In our opinion, start-ups often try to
jump the growth curve, and end up trying to scale a product which hasn’t yet had time to
morph into its final version. This behaviour is often due to the phenomenon mentioned
above. If a billion-euro valuation is seen as the holy grail, many companies adopt a
mindset of aggressive early-stage growth without taking the time to ponder whether their
product is ready to be scaled.
That is why we actually seek “camels” instead of unicorns. These are the companies that
are capital efficient, have solid unit economics, and focus on building sustainable growth.
Admittedly, the initial growth rate may be slower than that of an aspiring unicorn, but these
companies are more robust and resilient than their peers.
In good times, the camels thrive, but even under uncertainty, they survive, unlike the
aspiring unicorns that jumped the growth curve with high valuations and wind up with
downs rounds when the overall economic climate worsens and the bubble bursts.
Stop talking about unicorns: The way we measure European tech success needs to
Stop talking about unicorns: The way we measure European tech success needs to
Koska Gorilla Capital Fund 2017 Ky:n sijoituskohteet ovat nuoria ja juuri perustettuja yrityksiä, tähän rahoitustuotteeseen sisältyvissä sijoituksissa ei oteta huomioon ympäristön kannalta kestäviä taloudellisia toimintoja koskevia EU:n kriteerejä
We came across these two good articles. Definately worth to read you want to understand venture capital:
Friday Mach 6, 2020
To: Gorilla Capital portfolio companies
From: Risto Rautakorpi
The Corona issue – what to think about it
Note – I focus entirely on the business implications, personal health & safety is of course #1 priority and I leave those matters for the Healthcare professionals to advise on.
I rather cry wolf than regret later, and as “only the Paranoid survives”, I’m OK to be the paranoid.
No-one knows yet what the end outcome of the Corona issue will be. But already now it has caused a visible disturbance on businesses and economies worldwide and the ripple effects are yet to be seen. Some businesses are affected more than others, but very few will be completely immune. For some (like face mask producers or remote working solutions) this can create a massive windfall.
Your business will be affected as well. In what way, when and how severely, depends. That’s what you should now form a view on, and do mitigation accordingly.
A likely scenario for anyone selling to corporations: In the 1st wave, they focus on their people risks: they cancel attending events, making business trips, they ask people to work from home etc. In the 2nd wave they do the immediate adjustments to their own business (such as airline industry), in the 3rd wave they start calculating the cost of all that, and how to balance the effect. They will try to assess what their customers do and how that will affect their own business. The 1st thing they’ll do is step on the brakes and will do only the mandatory until the dust has settled – which means anything non-mandatory will be postponed. They will try to manage costs, in anticipation of their revenues declining. This may mean layoffs, freezing any new costs (such as development projects) etc. They will have to add new issues on their agenda, changing the priorities. At this point you will start feeling the heat.
These “never seen before” crisis are part of the business cycles. I’m older than any of you so I have experienced a few (and their direct consequences) myself: oil crisis 1973, Chernobyl 1986 (this was particularly scary in Finland, due to the typical wind directions), Iraqi war and 2nd oil crisis 1990, dot com crash 2000, Financial crisis 2008. Not to mention the next tier – SARS, Thailand Tsunami etc.
It’s not a bug, it’s a feature. If you sail across the Atlantic you’re likely to get into at least one big storm. You know that from the start so you prepare accordingly. And when the weather map turns dark, you get ready: you take down sails, close all holes, tie everything down, eat and rest while you still can, make raingear readily available. When the storm hits you, you are prepared. Then you do what you must to stay afloat, and just wait. Even the worst storms end one day, the sun is shining again and smooth sailing can continue.
But while sailing after is no different from sailing before, business after a crisis is never quite the same as before. Oil crisis triggered the need to reduce dependency on oil, Financial Crisis tightened regulation of financial markets etc. The mankind is trying take measures that “this could never happen again” (rather successfully, as the next major crisis is always a “never seen before” kind). Those changes create a ton of new business opportunities.
The Corona situation – once over and back to normal - will trigger such changes as well. What exactly, we all can make educated guesses about. They too will create opportunities.
Profits are made during the high season. Strategic moves are made during the low season.
My call to action to all of you:
- The eventual consequences of Corona will affect all of you (and us, as a result). Meaning you all need to take it on your agenda.
- You should analyse your situation (and that of your key customers), play with some scenarios and form a view on what you assume the implications to your business to be
- What is it you can and should do to mitigate the negative effects. Create an action plan on what to do if the storm hits you, and what is the indicator telling you the storm is on
- What new opportunities will this create, once the storm is over. How could you best benefit of it?
I sincerely hope none of this is ultimately needed and the world goes back to normal soon. But it would be irresponsible to just count on being lucky. Hope for the best, prepare for the worst!
Money is always a consequence, not the root cause. You work – you get paid. You sell – customer pays. You roll the dice and get lucky – you get rich. You have a business (plan) that works – you get funding.
But getting funding is not the end goal, not even for a startup. The end goal is to be able to pay all that funding back, and some more. To reach that you need to have a business that works. For getting there, you need the right strategy. The strategy should be all about your business: who is your customer, what is your offering, how you plan to win etc.
The journey from where you are today to where you need to be one day is typically so long that you may need to top up some fuel on the way. Funding is your fuel, helping you to get where you need to go. But it’s just a means to an end, not the reason your startup exists and definitely not your Northern Star. It should not be the driver for your thinking and activities, do not let “what do I need to do to get funded” to mislead you.
When the buyer is willing to buy you at reasonable terms. The most critical element of this is the motivation of the buyer, and that is out of your control. The “open to buy” window is created when their strategy shows a need they need to address and do it yourself doesn’t really cut it. That’s when they start looking, and you need to make sure you show in their radar screen when they do. And that is the part which you CAN control. Sometimes this happens earlier than you would have liked, sometimes later. Timing is not in your hands. Accept it, and act accordingly.
The best time is when you start the company. The second best time is now. But the preparation does not mean hiring an advisor etc, it is about doing the groundwork that will increase the probability of an exit, when the time for that is right.
No, but this is still more of an “exception” rather than “the norm”. Some investors who have a similar kind of basic philosophy (model is more of a “scalable Angel” rather than “VC”)
https://www.kimaventures.com/ (the only European on this list)
http://rightsidecapital.com/ (we owe a lot to these guys for setting up a role model we have taken full advantage of. Big thanks to Kevin & al for the inspiration and openly sharing their thinking)
https://svangel.com/ (building on the heritage of the original SuperAngel Ron Conway, they have the longest track record to demonstrate the strategy works)
https://500.co/ (the most vocal on this list. For them investing is just one of the things they do)
There certainly are more but most investors with this strategy tend to prefer a low public profile, they focus on their business rather than PR.