Insights on the Outperformance of Small Funds, the Vanity of AUM, and the Risks in Investing in AI Startups: Lessons from a “Traction First” VC with Nikhil Basu-Trivedi – 20VC

In the world of venture capital, there are many factors that contribute to the success or failure of a fund. One of the most debated topics is the size of the fund and its impact on performance. While larger funds often attract more attention and prestige, recent insights suggest that smaller funds can outperform their larger counterparts.

Nikhil Basu-Trivedi, a venture capitalist and co-founder of Shasta Ventures, has gained significant experience in the industry and has valuable insights to share. In a recent interview on the podcast “20VC,” Basu-Trivedi discussed the outperformance of small funds, the vanity of assets under management (AUM), and the risks associated with investing in artificial intelligence (AI) startups.

Basu-Trivedi argues that smaller funds have a unique advantage over larger funds when it comes to generating returns. He believes that smaller funds are more nimble and can make quicker investment decisions. They can also focus on specific sectors or niches, allowing them to develop deep expertise and build strong networks within those areas. This specialization often leads to better deal flow and higher-quality investments.

Furthermore, Basu-Trivedi highlights the vanity of AUM as a misleading metric for fund performance. Many investors and limited partners (LPs) tend to associate larger AUM with success and credibility. However, he argues that AUM does not necessarily correlate with investment performance. In fact, larger funds often face challenges in deploying capital efficiently and may be forced to invest in suboptimal opportunities to meet their deployment targets.

Basu-Trivedi emphasizes the importance of focusing on “traction first” when evaluating startups for investment. He believes that startups should demonstrate early signs of customer adoption and market validation before receiving significant funding. This approach helps mitigate the risks associated with investing in early-stage companies, especially in emerging sectors like AI.

Speaking specifically about AI startups, Basu-Trivedi acknowledges the immense potential of the sector but also highlights the risks involved. While AI has the power to revolutionize industries and create significant value, it is still a nascent field with many uncertainties. Investing in AI startups requires a deep understanding of the technology, the market dynamics, and the potential risks associated with ethical considerations and regulatory challenges.

Basu-Trivedi advises investors to approach AI investments with caution and to seek startups that have a clear value proposition, a strong team, and a well-defined go-to-market strategy. He also emphasizes the importance of diversification within the portfolio to mitigate the risks associated with investing in a single sector.

In conclusion, Nikhil Basu-Trivedi’s insights shed light on the outperformance of small funds, the vanity of AUM, and the risks in investing in AI startups. His experience as a venture capitalist highlights the advantages of smaller funds in terms of agility and specialization. He also cautions against relying solely on AUM as a measure of success and emphasizes the need for traction and market validation when evaluating startups. Lastly, he advises caution when investing in AI startups due to the inherent risks and uncertainties in the field.

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• Source: Plato Data Intelligence.
• Source Link: https://zephyrnet.com/20vc-why-small-funds-outperform-large-funds-aum-is-a-vanity-metric-why-99-of-investments-in-ai-startups-will-go-to-zero-being-a-traction-first-vc-investing-lessons-from-investing-in-canva-a/