How we generated 10x VC returns

Posted in Reflections by Tim Morgan on December 23, 2015

We’re often asked to participate in talks or publications about Startup Studios. The common question is about the money. The tone is generally “Startup Studios are all well and good, but are they just a bunch of agency folk messing around?”

At Mint we started developing our own products for a number of reasons, only one of which was financial. Also we wanted to:

  1. Scratch an intellectual or creative itch;

  2. Make cool things;

  3. Improve our working environment;

  4. Show the world what we can do;

  5. Put ourselves in the same shoes as our clients.

But as 2015 is drawing to a close I decided to investigate the financial returns on Mint’s various ventures. Here is my methodology:

  1. Choose a time period – I chose the past 5 years starting Jan 1st 2011 and ending Dec 31st 2015;

  2. Identify all of the ventures that Mint has pursued in that time;

  3. Map all the cash inflows and outflows of said ventures;

  4. In the case of ventures that have spun out and become separate entities, mark our ownership to market based on the last arm’s length valuation (the value at the last round);

  5. Compare to the European venture capital industry.

And here are the results:

  1. Over the 5 years Mint conceived and launched 64 startups;

  2. Our net investment in these ventures (investment less contribution from trading income) has been around £1.6m;

  3. Our 5 year IRR is 275%;

  4. Only 3 out of 64 startups have generated any sort of return, though this is perhaps not unexpected if web investment returns follow a power law distribution.

Now to compare with venture capital. I polled some VC friends and did some desktop research and ascertained the following benchmarks:

  1. The FTSE long term IRR is 7%;

  2. For the same period (2011-2015) solid VC returns would be around 15%-30% IRR.

Mint’s returns are around 10 times typical European VC returns.

This validates the economics of the Startup Studio somewhat, I have some thoughts as to why the returns are superior:

  1. The Venture Capital industry is inefficient because VCs generally invest in inexperienced entrepreneurs who then go and make the same mistakes concurrently. For example, in any year, say 3 portfolio companies from the same VC might be making the same hiring mistakes. There is little aggregating of knowledge. By way of contrast a Startup Studio is effectively a serial entrepreneur in corporate form and serial entrepreneurs have greater chances of success than first time entrepreneurs .

  2. Startup Studios, can invest money slower and over a longer period. Traditional VC backed businesses are under time pressure from Day 1 to match the rhythm and expected return/time period of the VC. There is a runway, it is decreasing, there is a stop point, there is no option to do nothing and sometimes nothing is the best option.

And some criticisms:

  1. There might be something in the calculation of VC IRR that I don’t fully understand and so we’re missing some key data;

  2. We might have got lucky and not have a repeatable formula;

  3. We haven’t spent anything like enough money to know. What would happen if we had £10m or £100m?

Merry Christmas everyone and here’s to more Startup Studio led innovation in 2016!

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