Are you joking? You don't think a 100% gain is good for a 1-2 month timeframe? The most successful hedge funds in the world have money thrown at them if they can average 50% gains over the course of a year. And that is an outstanding year!
I realize the economics of hedge funds and VC funds are different in that VC's take a shotgun approach and hope that one out of ten investments makes up for all the losers, but on any single investment a 2x return is outstanding. On the surface it looks like the founders got screwed nicely on this one.
> if they can average 50% gains over the course of a year
That's the point, this isn't what happened. Given the choice between 2x return in 2 months or 10x return in 120 months, there's no contest at all. That initial investment that returned 2x is now out of play for the life of the fund. If the fund's life is 10 years, the return is 1.1x, not 2x.
Okay, you go ahead and bet on the companies that will pay you a 10x return in ten years and I'll take the 2x return in two months. Will Instagram even exist in 10 years? Who knows? I wouldn't bet on it.
BTW, you're absolutely right. The 2x return extrapolates to a return of trillions of dollars over ten years, so there really is no contest at all.
It doesn't matter if you run a hedge fund, a VC fund, or a trust fund. A 2x return is a 2x return, and anybody would take it any day. Anybody who wouldn't has no business working in finance. Just because you assign a ten-year time frame to your portfolio does not diminish the return on that investment, so the return on your $50mm is 2x, not 1.1x.
If you guide your investment strategy based only upon what you hope will happen in the best-case scenario and look down upon investments that double your investment, you're making a mistake. The only reason they need a 10x return on their winners is because at least nine other bets are going to lose. Any win adds value to the fund. As a fund manager would you rather the $50 million have been plowed into a business that returned 0% which is what you expect to have happen ~90% of the time? Do you understand why criticizing this investment makes no sense? You're comparing a great investment to the few investments that turn out to be astronomically fantastic instead of the vast majority that lose money.
> It doesn't matter if you run a hedge fund, a VC fund, or a trust fund. A 2x return is a 2x return, and anybody would take it any day. Anybody who wouldn't has no business working in finance. Just because you assign a ten-year time frame to your portfolio does not diminish the return on that investment, so the return on your $50mm is 2x, not 1.1x.
This is your key misunderstanding. When the fund starts, you lock up the money for a specific amount of time (say, 10 years), and once the money's been in, it can't go in a second time. So if you're near the beginning or middle of the fund, and the fund was < $500MM or so you probably wouldn't take 2x on $50MM today, because that $50M will be out of play for the next (say) 9 years.
In other words, it does diminish the return on that investment, because that $50MM is now out of play. Every dollar gets one shot of multiplying, and when it's done it's done, as far as the fund is concerned.
If the fund is near the end of its life and for some odd reason they still have $50MM sitting in it, then yeah, it'd be a great move.
Also, if every dollar has one chance to multiply and you take one tenth of the fund and immediately double it at the beginning of its lifetime, that is an outstanding outcome. Just because you can't reinvest the money in that fund does not mean it is lost, it is simply paid out to investors right away.
Anybody who has taken a finance course knows the simple principle that a dollar today is worth more than a dollar tomorrow. It is NEVER better to make a return of equal percentage later in a fund than early. Instead of having $50 million to invest in the original fund in the same companies as before, you now have $100 million to invest in the same companies as before. The fallacy in your logic is that you are hung up on the required return for that single fund.
The only way what you are saying is valid is if by investing that $50 million in Instagram, they missed out on the opportunity to invest in another company that at some point in the future would have returned more. In a window of about two months, I highly doubt that's the case. Again, once you have doubled your money and gotten it back, you can invest it anywhere you like, including the same companies you may have before. But now you have twice as much money. There is nothing magical about that fund that makes its investments more special than another.
> Again, once you have doubled your money and gotten it back, you can invest it anywhere you like, including the same companies you may have before. But now you have twice as much money.
Again, that's exactly wrong. As far as the fund is concerned, that money's gone.
Exactly. The money is gone "as far as the fund is concerned." But that money is no more gone than it is when I sell stock and convert it to cash. A fund not recognizing money does not mean that that money ceases to exist.
I fully understand that. What I am explaining to you is that the idea of a VC fund is to create a return by investing money in a portfolio of companies which overall, should create a positive return. There is absolutely no way of knowing going in what the fund will return. If I figure that out of ten investments one will create a positive return great enough to pay for nine others, that does not mean that I am hoping or expecting that each of the ten will return me 10x. Keep in mind that those nine losers are completely independent of each other. If five win and five lose, all the better. If five win and three break even and two lose, that's even better.
If I invest $100 into 10 different stocks, and I figure that nine of the ten are going to be losses, then I hope that one of the ten will return me at least $1000, or 10x my original investment. That's very different than saying that any of the ten that returns me less than 10x is a disappointment. On the contrary, if one happens to return me 10x over the lifetime of my portfolio and another returns me 2x, then I am even better off than I anticipated.
Except that because they'll get paid x% in FB stock, the life of this investment is now extended until they choose to sell the FB stock, which means the return could go up (or down!).
I realize the economics of hedge funds and VC funds are different in that VC's take a shotgun approach and hope that one out of ten investments makes up for all the losers, but on any single investment a 2x return is outstanding. On the surface it looks like the founders got screwed nicely on this one.