Pacing in a VC fund context is how much capital the firm is investing in a given period and tracking that over time.
I don’t think a VC firm should manage to a pacing number. It should manage to the opportunity set that it sees.
But I think pacing is a great thing to track in the rearview mirror.
I like to look at investment pace by quarter and year. And by dollars and deals. And by new names and follow-ons.
If you keep track of that, chart it, and review it, you will be mindful of whether the firm is getting too far out over its skis or heels.
And that is a super useful thing to be aware of.
Useful takeaway to me is that creating new metrics to track behaviors and cycles is always valuable and in retrospect is a place to start.An aside though still analogous to discovering metrics.Find it super interesting/challenging in the crypto collectibles and gaming space, how difficult it is to create metrics of value of gameplay and collections that don’t fall prey to treating NFTs like currencies and mapping everything by price.
Understand. But how do you manage vintage risk ex-post? VC is also exposed to prevailing themes or technologies in a given period. And investing most of the fund ahead of a market correction could also hurt (like it did with PE firms who over-invested in 2007-08).
Institutional LPs would generally regard macro risks like this as an exogenous factor to fund/manager performance and should be mitigated at the LP level rather than the GP. It has also led to the use of things like the PME rather than simple IRR. At the GP level, the GP is paid to deploy capital, not time macro factors.OTOH, concentration risk can be managed at the fund level.
Agreed. It’s the same for investment strategies. But I guess the GP is concerned by his/her carried interest and must take macro factors into account. Especially where we are in the cycle. No?
If someone wants to mitigate their own risk factors, it’s up to them – ie, if you work at a VC fund and have carried interest, put your 401k into things other than illiquid equities. Doing that inside the fund isn’t the right answer.Or alternately, if the endogenous risks are problematic, maybe VC isn’t a good career path. It’s a high risk, high reward strategy that only pencils out for the top decile, maybe quartile.But for the most part, they should quit worrying about it and focus on finding the next FB (but avoiding the next Fab)!
Sounds like a speed limit analogy.
If you’re willing, would kindly request a follow-up post on your experience with time diversity and deployment periods as a VC. I hear this second-hand from different people, but that funds used to be 4 years of deployment, went down to 3, and many are now on 2-year fundraising cycles as they scale AUM. If the mood strikes you, would love to read the AVC treatment on this topic and trend.
what is the second hand new ? I love to know
“If you keep track of that, chart it, and review it, you will be mindful of whether the firm is getting too far out over its skis or heels.” –> extends to pretty much anything in business. The only consistent advice I give is to make your business measurable, even if it’s laborious to do so. You learn so much so quickly from a simple chart.
Re: pacing – I don’t think the firm should manage to a set investment term, but LPs have expectations based on the firm’s reps during fund-raising of the investment period and they have cash flow schedules that they’re trying to manage as well. If you say you’re expecting a four year investment period and make all your initial investments in the first 18 months (not including follow-on reserves), some of them are going to be annoyed.
Would you be willing to share with us your experience in how you paced the capital deployment of your various funds (doesn’t have to be too specific)? It would be really interesting to hear about that!
When it comes to your bet size, Learn from the smartest of our time, Edward Throp (Bet large when the probabilities are in your favorite, less when they are not)Edward Thorp: By solving equations, it is possible to calculate the precise probabilities of losing, given any collection of cards for any number of decks. To calculate these probabilities, I first had a computer take out four aces from a full deck, and I discovered that the deck shifted in favor of the casino by quite a lot. This was good news because if I put back in four aces, I knew the exact opposite would happen and the cards would now be in my favor. I repeated this process with all ranks of the deck. When the deck is filled with big cards, it becomes in favor of the player. On the contrary, when the deck is filled with small cards, it shifts the edge in favor of the casino. Therefore, players want small cards to come out of the deck. I developed many card counting systems and spent the next year executing these systems. I started with hand calculations, which did not get me very far, and then I went to teach at MIT. There I had access to a high-speed computer. I spent almost a year teaching myself how to program and running subroutines that I would later piece together into a program that would evaluate how the missing cards affected the game of blackjack.
That was one of my mistakes: When the article in, IIRC, Sports Illustrated came out, I was in, whatever, maybe middle school, had been playing Blackjack off and on, usually just for chips and not for money. I saw that Thorpe was correct about card counting, e.g., from your quote or some such, and thought maybe I should catch a bus to Vegas for the summer. Then I guessed that since the article was in Sports Illustrated, Vegas would be swamped with Blackjack card counters.Nope! History showed that the Vegas casinos had been making so much money for so long from suckers with systems that long, maybe several years, they laughed at any idea that there was anything to Blackjack card counting.But eventually Vegas, etc. caught on and started using ugly techniques to stop the card counters!But for that first summer, I could have picked up some nice green without any of the casinos “getting wise”!
If it matters, measure it
Was speaking to a public CEO for my podcast this morning. They “weigh and measured” everything. Pacing is weighing and measuring. However, in VC the fat pitches always don’t come at you in a measured manner like a mile run on a quarter mile track.
This made me think of a pitch deck I saw once from a founder team that wasn’t filled with typical charts and graphs about their metrics and their data. It was filled with a series of slides that charted their progress over time and where funding rounds correlated to bottlenecking problems in the company development as they related to problems they were solving for their customers. I found this tool useful as a measure of growth of the founders as much as it was a tool to understand how they fit their product into the market. That’s a way of saying, I guess, that hard baked templates or number projections are sometimes not as useful as a guide as awareness of what’s really happening on the ship and in the ocean.
You are right…………..