Money2020, the largest finance tradeshow in the world, takes place each year in the Venetian Hotel in Las Vegas. At a recent gathering, above the din of slot machines on the casino floor downstairs, cryptocurrency startups pitched their latest coin offerings, while on the main stage, PayPal President and CEO Dan Schulman made an impassioned speech to thousands about the globe's working poor and their need for access to banking and credit. The future, according to PayPal and many other companies, is algorithmic credit scoring, where payments and social media data coupled to machine learning will make lending decisions that another enthusiast argues are "better at picking people than people could ever be." There's now a whiff of a hope that big data might finally shore up the risky business of consumer credit. Credit in China is now in the hands of a company called Alipay, which uses thousands of consumer data points -- including what they purchase, what type of phone they use, what augmented reality games they play, and their friends on social media -- to determine a credit score.
Just a decade ago, few would have guessed that virtual goods could create a real market. Then the smartphone age sparked a whole new universe of ephemeral, yet lucrative, commerce. "People have gotten much more comfortable with the idea of paying for things that are virtual," says Joost van Dreunen, the co-founder and CEO of SuperData, a gaming research firm. For startups in this fast-growing market, the goods may be fake, but the sales are real. Some of the most promising new areas of business are hidden behind what can sound like Millennial smartphone-speak: Kimoji!
These venture bets on startups that "returned the fund," making firms and careers, were the result of research, strong convictions, and patient follow-through. Here are the stories behind the biggest VC home runs of all time. In venture capital, returns follow the Pareto principle -- 80% of the wins come from 20% of the deals. Great venture capitalists invest knowing they're going to take a lot of losses in order to hit those wins. Chris Dixon of top venture firm Andreessen Horowitz has referred to this as the "Babe Ruth effect," in reference to the legendary 1920s-era baseball player. Babe Ruth would strike out a lot, but also made slugging records. Likewise, VCs swing hard, and occasionally hit a home run. Those wins often make up for all the losses and then some -- they "return the fund." "If you do the math around our goal of returning the fund with our high impact companies, you will notice that we need these companies to exit at a billion dollars or more," he wrote.
Excluding an outlying 1-billion financing of Snapchat Inc., Los Angeles start-ups pulled in 57% less cash from venture capitalists in the second quarter compared with a year earlier. The number of investments also dropped 42%, according to Dow Jones VentureSource data released Thursday. Though steeper in the Los Angeles region, the decline in venture capital activity is reflected nationwide and continues a yearlong trend. Last summer, investors turned more cautious after realizing they were valuing start-ups too richly. At such prices, the companies could struggle to go public or find a buyer – especially at a time of global economic uncertainty.