Part 1

• Those who fund VCs include: pension funds, university endowments, charitable foundations, and, to a much lesser extent, insurance companies, wealthy families and corporations
• Funds are raised in the form of a limited partnership typically with a 10-year lifespan.
• They do not invest in startups beyond the 3 years to ensure their latest investments have a chance to reach liquidation before the partnership legally ends. So they have to raise new partnerships every 3 years or less.
• The top 20 firms (out of approximately 1,000 total VC firms) generate approximately 95% of the industry’s returns. These 20 firms don’t change much over time and are so oversubscribed that they are very hard for new limited partners to access.
• VCs have the greatest risk of all the asset classes in which institutions invest.
• 80% of a typical venture capital fund’s returns are generated by 20% of its investments, which requires a high hurdle for each prospective investment.
• Industry rule is too look for deals that can return 10x your money in five years, which works at a IRR of 58%. For example, If 20% of a fund is invested in deals that return 10x in five years and everything else results in no value then the fund would have an annual return of approximately 15%.
• In the past 10 years, the top 20 firms have done better and everyone else has done worse.
• The only way to generate outstanding returns is to be right and non-consensus, gotta take risk.
• There are only approximately 15, plus or minus 3, technology companies started nationwide each year that reach at least $100 million in revenue ... usually generate return multiples in excess of 40x. And which one at the time would've though of as a crazy stupid investment.
• Beware of fund of funds, brokerage firm funds.

Part 2

• VCs in the past use to follow a model where they would find companies with high technical risk and low market risk because of lack of market was and still is the primary cause of failure.
• Value Hypothesis: An assumption on how a product is valuable to potential customers.
• Growth Hypothesis: An assumption on how new customers will discover a new product or service cost-effectively.
• Founders should be focused on testing the value hypothesis first then growth hypothesis.
• A startup that has proven it's growth hypothesis is 3-5 times more valuable than one that has only validated their value hypothesis.
• To justify more financing that will create dilution, the management team must believe that the incremental percentage growth in revenues from the financing is great than the dilution taken in the round. For example: Company A currently has $10 million annualized revenue rate (ARR) with expected annual revenue (EAR) of $160 million in 4 years. Assume Company A can raise $50 million at a pre-money valuation of $600 million. And with the added financing of $50 million they can increase EAR to $200 million. That would mean 7.7% of dilution for 25% increase in EAR which is a higher value per share for all stakeholders.
• Best VC investors should look to invest when the value hypothesis is proven but right before the growth hypothesis works. Premier VCs believe it is better for angel investors to finance startups until they reach product-market fit, it's better to way and pay a higher price to finance a company that has proven its value hypothesis because the market risk is seldom worth taking.