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Andreessen Horowitz made a 312x return within two years from its investment in Instagram.A mistake that many a VC fund can make is to quickly invest all of its capital and leave no dry powder for follow-on investments.Follow-ons are a true test of a venture manager, facing the sunk-cost fallacy of deciding to pour more money after a bad investment, or to back a winner.This provides governance and absolute dollar return advantages at exit. By following-on, an investor can maintain its ownership percentage in the startup, without being diluted.This is the process of investing in the future rounds of existing portfolio investments. 66% of the money in a VC fund should be reserved for following-on.Lesson 3: Following-on is critical – As with Blackjack double-downs, you must press your winners. The characteristics of this fat tail curve mean that a tiny number of returns are huge, but the overwhelming majority are unspectacular (the tail).
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Venture deal and venture capital fund returns mirror that of a power law distribution.The idiosyncratic, subjective, and almost artistic nature of venture investing is unlike the traditional realms of finance, where many new VC professionals enter from.Since 1997, less capital has been returned to venture investors than has been invested into its funds. Yet, venture capital investment returns have consistently underperformed relative to public markets and other alternative assets.In addition, VCs invest in startups that everyday people interact with (e.g., apps) as opposed to, say, a PE fund that invests in power plants. Why is VC popular? Recent advances in technology make it more accessible and cheaper to start new businesses, which in turn has increased funding opportunities.The VC industry has rapidly grown in both popularity and activity, in 2017, $82.9 billion of venture deals were executed in the USA, compared to $27 billion in 2009.Because it's unlike other financial asset classes, venture capital portfolio strategy is often misunderstood by newcomers.