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Are VC returns really poor on average? I thought their hit rate (1 company out of 50 being successful) was poor, but their returns are stellar because of the fe

by nekopa 11y ago

Are VC returns really poor on average? I thought their hit rate (1 company out of 50 being successful) was poor, but their returns are stellar because of the few unicorns. If your conclusion is correct, how are the VCs staying in business?

didgeoridoo 11y ago
The trailing 10-year average of VC returns is approximately the same as the S&P, but with orders of magnitude more volatility. http://www.inc.com/kimberly-weisul/venture-capital-funds-make-decent-money-this-is-news.html http://www.inc.com/kimberly-weisul/venture-capital-funds-mak...
graycat 11y ago
Data on average venture returns is at: http://www.avc.com/a_vc/2013/02/venture-capital-returns.html#disqus_thread http://www.avc.com/a_vc/2013/02/venture-capital-returns.html... http://www.kauffman.org/newsroom/2012/07/institutional-limited-partners-must-accept-blame-for-poor-longterm-returns-from-venture-capital-says-new-kauffman-report http://www.kauffman.org/newsroom/2012/07/institutional-limit... Net, on average, the returns are poor. > If your conclusion is correct, how are the VCs staying in business? Reasons: (1) The money comes from the limited partners (LPs), and they are heavily investors with big bucks. We're talking billions, from university endowments, state pension funds, sovereign wealth funds (say, a fund run by a rich Mideast oil country), some family wealth funds, maybe some insurance companies, maybe some hedge funds. Of course, venture might hit a grand slam with great returns, and no doubt each venture firm that raises money from LPs claims that they are a top tier firm with great advantages and some great investment themes that with their "deep domain knowledge" and great business experience and insight will let them get much better than average returns. These limited partners invest billions in all good looking asset classes. Venture capital is regarded by the LPs as an asset class but is relatively small. So, for the limited partners, venture capital is small potatoes and slips in under the wire even if on average the returns have been poor. (2) The LPs have FMO -- fear of missing out. Due to the rapid progress of technology, the Internet, etc., the venture firms can keep telling the LPs that "This time it's different." with some possibility of being correct. So, some portfolio manager at an LP doesn't want to have to answer why they didn't invest in KPCB or Sequoia and, thus, missed out on Google. (3) The LPs are not good at technology or able to evaluate "ideas" or look for "better" ideas. Instead, the LPs are closer to traditional commercial bank lending and private equity that put a lot of weight on accounting statements and don't expect to evaluate ideas or technology. So, the LPs are not pushing their venture firms to evaluate "ideas".

by nekopa 11y ago

didgeoridoo 11y ago

The trailing 10-year average of VC returns is approximately the same as the S&P, but with orders of magnitude more volatility. http://www.inc.com/kimberly-weisul/venture-capital-funds-make-decent-money-this-is-news.html http://www.inc.com/kimberly-weisul/venture-capital-funds-mak...

graycat 11y ago

Data on average venture returns is at: http://www.avc.com/a_vc/2013/02/venture-capital-returns.html#disqus_thread http://www.avc.com/a_vc/2013/02/venture-capital-returns.html... http://www.kauffman.org/newsroom/2012/07/institutional-limited-partners-must-accept-blame-for-poor-longterm-returns-from-venture-capital-says-new-kauffman-report http://www.kauffman.org/newsroom/2012/07/institutional-limit... Net, on average, the returns are poor. > If your conclusion is correct, how are the VCs staying in business? Reasons: (1) The money comes from the limited partners (LPs), and they are heavily investors with big bucks. We're talking billions, from university endowments, state pension funds, sovereign wealth funds (say, a fund run by a rich Mideast oil country), some family wealth funds, maybe some insurance companies, maybe some hedge funds. Of course, venture might hit a grand slam with great returns, and no doubt each venture firm that raises money from LPs claims that they are a top tier firm with great advantages and some great investment themes that with their "deep domain knowledge" and great business experience and insight will let them get much better than average returns. These limited partners invest billions in all good looking asset classes. Venture capital is regarded by the LPs as an asset class but is relatively small. So, for the limited partners, venture capital is small potatoes and slips in under the wire even if on average the returns have been poor. (2) The LPs have FMO -- fear of missing out. Due to the rapid progress of technology, the Internet, etc., the venture firms can keep telling the LPs that "This time it's different." with some possibility of being correct. So, some portfolio manager at an LP doesn't want to have to answer why they didn't invest in KPCB or Sequoia and, thus, missed out on Google. (3) The LPs are not good at technology or able to evaluate "ideas" or look for "better" ideas. Instead, the LPs are closer to traditional commercial bank lending and private equity that put a lot of weight on accounting statements and don't expect to evaluate ideas or technology. So, the LPs are not pushing their venture firms to evaluate "ideas".