The Power Law At Work
One of Collaborative’s portfolio companies was acquired earlier this year, generating a fantastic return on our investment.
For context, we originally invested in the company in its Series A round. In a relatively short timeframe the company was acquired for cash at about 16X the valuation we originally invested at. Our investment was diluted in subsequent financings, which brought our realized return to about 13X.
I share this for a few reasons:
I’m excited for the founders and team who built the business. They created tremendous value through hard work, and in the face of lots of doubters.
As an investor, I’m grateful for the opportunity to be part of their journey. It was a tremendous learning experience.
It’s rare for the Collaborative team to celebrate. We operate in a constant state of needing to push harder, trying to earn a better spot, learning how to get better as an investor, frustrated that we missed or passed on a great opportunity. So when an event like this happens, I want to take the opportunity to celebrate the hard work that our team puts in every day. In today’s market, realized returns are rare and deserve a legitimate moment. Normally, I prefer to shy away from touting great financial results. I find the venture industry to be too heavily skewed towards a lot of talking and not enough walking. So our default mode is simply to keep our head down and let our results speak for themselves. But today I am making an exception!
This investment required a contrarian view. As a seed-focused firm, we took criticism for investing in the Series A. And for reasons outside of stage, two of the three people on our deal team at the time where against investing. So you can chalk this up as yet another example of when consensus is the enemy of alpha.
Venture capital is a weird business. Our model assumes at least 50% of the companies we invest in will go out of business. The only way for a venture capital firm to generate great returns for its investors is to have outcomes that follow the power law curve. Which is what happened with this investment.
A few of our investments will drive nearly all of our returns. It’s easy to forget that on a day-to-day, or even year-to-year basis. But occasionally we’re reminded what the hard work of our investment team, and the companies we back, can turn into.