Venture capital is financial capital provided to early stage companies, which have a high potential for rapid growth and scalability. These companies usually are high tech companies that possess a disruptive technology, or a novel business model. Typically, VC investments occur after the company has obtained it’s seed funding, and this subsequent capital raise, is recognized as the first in a series of growth funding rounds. It is the intention of the VC firm to successfully exit this investment, by means of a a liquidity event( sale or IPO) within the required time-frame ( 3-7 years). Hopefully, they will have generated a large enough return on their investment to justify the extremely high risk of funding a start-up.
Investing in start-ups is so risky that VC’s typically only invest in about 2% of the companies they look at. Nevertheless, in an effort to increase their probability of success, VCs will build a portfolio of companies, knowing that approximately 60% will break even, 20% will go bankrupt, and 20% will hit a home run. It is the concept of the home run that is fundamental to understanding the venture capital model. In VC parlance a home run is any investment which can return the whole capital of the portfolio at least once, and a 25X multiple is usually accepted as a proxy for that level of performance.
Consider that of the nearly 2,000 technology initial public offerings since 1980, only 5% account for over 100% of the $2-trillion-plus in wealth creation. And even within this small wealth generating group, only a handful delivered the bulk of the huge payoffs. Therefore we can draw the conclusion that it is in the tails where venture returns are generated.The home run’s impact on venture returns is critical to it’s success, and every successful venture fund in history has included at least one home run. Most VC firms are often referenced by the particular home run company they invested in, as with Kleiner- Perkins and Google, or Accel Partners and Facebook.
The home run theme in venture capital parallels the "killer mentality" found in all successful traders. It is a concept that is universally shared by all the great traders - Paul Tudor Jones, Louis Bacon, George Soros, and John Paulson. This mentality is a recurring theme with traders like Bill Eckhardt, Tom Baldwin, Bruce Kovner, and almost all the “Wizard” traders. Just like the VC firms that were recognized by the extemely successful companies they invested in, these traders are remembered for the career changing trades they made, i.e., Soros shorting the British Pound, and Paulson shorting CMOs.
Successful trading is not so much about finding a better indicator or trading system. Trading boils down to mathematics and patience. It is about the ability to identify and wait for extremely profitable opportunities, and then take maximum advantage of them. Just like venture capital, the trades that can make a difference, are found in the tails.
This is one reason why trading is so difficult. There is the eternal dichotomy, where one must be conservative with risk, getting out of losing trades quickly, while at the same time pressing and adding when the moment is right. We often find traders that are so risk averse and gun shy that they can never get past trading their 1s, 2s, and 3 lots, and at the same time we see traders that revenge trade out of frustration. However, it is rare to find the trader that realizes that 80% of the time, he is going to make or lose a small amount of money or scratch. But, realizes that the corollary to that statistic are the frequent times when opportunity and probability calls for the trader to step beyond their own comfort levels and risk thresholds, and lever up.
Successful traders tend to increase their size in direct proportion to their confidence in a trade. And, what is true for size is also true for time. The less-successful trader is apt to become risk-averse in the face of a profitable position and exit early. Overzealously attempting to avoid the turning of profitable trades into losing ones can have a detrimental effect also, because it makes the strategy of pressing your winners, unable to reach it's true potential because profits are cut short.
I have had the privilege of trading beside Tom Baldwin and Charlie Di Francesca in the Bond pit, and Dimitri Balyasny, while we were both prop traders with Schonfeld Group , and before I bought my CBOT membership, I leased my first seat from Bill Eckhardt. All these traders had the uncanny ability to know when to press a trade, and I am sure that each one of these traders would admit that this ability was paramount in their success. Bill Eckhardt is quoted as saying, ““One common adage on this subject that is completely wrongheaded is: you can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.”
Avoiding losses by taking small winners will make the trader “feel” successful, as their P&L will be more profitable in the short term, but it will directly affect their long term performance. It will also become progressively more difficult to overcome slippage and commissions when scalping for small profits as your size increases. Therefore, traders must practice what is best for them, and not what makes them feel better. It is only then that their P& L will progress to the next level.
Investing in start-ups is so risky that VC’s typically only invest in about 2% of the companies they look at. Nevertheless, in an effort to increase their probability of success, VCs will build a portfolio of companies, knowing that approximately 60% will break even, 20% will go bankrupt, and 20% will hit a home run. It is the concept of the home run that is fundamental to understanding the venture capital model. In VC parlance a home run is any investment which can return the whole capital of the portfolio at least once, and a 25X multiple is usually accepted as a proxy for that level of performance.
Consider that of the nearly 2,000 technology initial public offerings since 1980, only 5% account for over 100% of the $2-trillion-plus in wealth creation. And even within this small wealth generating group, only a handful delivered the bulk of the huge payoffs. Therefore we can draw the conclusion that it is in the tails where venture returns are generated.The home run’s impact on venture returns is critical to it’s success, and every successful venture fund in history has included at least one home run. Most VC firms are often referenced by the particular home run company they invested in, as with Kleiner- Perkins and Google, or Accel Partners and Facebook.
The home run theme in venture capital parallels the "killer mentality" found in all successful traders. It is a concept that is universally shared by all the great traders - Paul Tudor Jones, Louis Bacon, George Soros, and John Paulson. This mentality is a recurring theme with traders like Bill Eckhardt, Tom Baldwin, Bruce Kovner, and almost all the “Wizard” traders. Just like the VC firms that were recognized by the extemely successful companies they invested in, these traders are remembered for the career changing trades they made, i.e., Soros shorting the British Pound, and Paulson shorting CMOs.
Successful trading is not so much about finding a better indicator or trading system. Trading boils down to mathematics and patience. It is about the ability to identify and wait for extremely profitable opportunities, and then take maximum advantage of them. Just like venture capital, the trades that can make a difference, are found in the tails.
This is one reason why trading is so difficult. There is the eternal dichotomy, where one must be conservative with risk, getting out of losing trades quickly, while at the same time pressing and adding when the moment is right. We often find traders that are so risk averse and gun shy that they can never get past trading their 1s, 2s, and 3 lots, and at the same time we see traders that revenge trade out of frustration. However, it is rare to find the trader that realizes that 80% of the time, he is going to make or lose a small amount of money or scratch. But, realizes that the corollary to that statistic are the frequent times when opportunity and probability calls for the trader to step beyond their own comfort levels and risk thresholds, and lever up.
Successful traders tend to increase their size in direct proportion to their confidence in a trade. And, what is true for size is also true for time. The less-successful trader is apt to become risk-averse in the face of a profitable position and exit early. Overzealously attempting to avoid the turning of profitable trades into losing ones can have a detrimental effect also, because it makes the strategy of pressing your winners, unable to reach it's true potential because profits are cut short.
I have had the privilege of trading beside Tom Baldwin and Charlie Di Francesca in the Bond pit, and Dimitri Balyasny, while we were both prop traders with Schonfeld Group , and before I bought my CBOT membership, I leased my first seat from Bill Eckhardt. All these traders had the uncanny ability to know when to press a trade, and I am sure that each one of these traders would admit that this ability was paramount in their success. Bill Eckhardt is quoted as saying, ““One common adage on this subject that is completely wrongheaded is: you can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.”
Avoiding losses by taking small winners will make the trader “feel” successful, as their P&L will be more profitable in the short term, but it will directly affect their long term performance. It will also become progressively more difficult to overcome slippage and commissions when scalping for small profits as your size increases. Therefore, traders must practice what is best for them, and not what makes them feel better. It is only then that their P& L will progress to the next level.
