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This gives an interesting glimpse into the prognostication abilities of supposedly brilliant VC's. It also shows the the near-impossibility of cashing in privat

This gives an interesting glimpse into the prognostication abilities of supposedly brilliant VC's. It also shows the the near-impossibility of cashing in private company shares, at least through VC's. In addition to this story, the Sony hack revealed that Evan Spiegel of Snapchat wanted to cash in about $40 million worth of shares just after he spurned Facebook's $3 billion offer. He was also roundly rejected. Had someone bought those shares, they would have been worth around $200 million today. So anyone thinking that they're going to get much liquidity as a private company founder should think again. If the Snapchat and Twitch guys were rejected, the odds are not good that you will be the exception.

coffeemug 11y ago
> This gives an interesting glimpse into the prognostication abilities of supposedly brilliant VC's. The question isn't whether VCs are brilliant according to some absolute metric. The question is whether they deploy capital better than random chance. The numbers show that top ten VCs consistently do.
- fweespeech 11y ago
  > The question isn't whether VCs are brilliant according to some absolute metric. The question is whether they deploy capital better than random chance. The numbers show that top ten VCs consistently do. Does it? If you have enough gamblers in a high stake casino where the house hasn't stacked the deck, some of them will seem to consistently win in comparison to the other players. Similarly, a very small percentage of VCs and other active investors consistently beat the market. A percentage so small I'm not sure anyone can statistically say they are doing so through skill. Similarly, your argument is the top 10 are consistent. Yes. And the top 10 aren't a statistically significant sample in a market of thousands of investors.
  - coffeemug 11y ago
    This analysis breaks down if the top ten outperform the market after you've started watching them. If that's the case (which for top ten VCs it is), the math suggests it isn't a "million quarters" situation.
    - msellout 11y ago
      That would need to hold for substantially all of the "top" outperforming our expectation of a naive person with the same deal-flow.
    - tremguy 11y ago
      This.
    - fweespeech 11y ago
      > This analysis breaks down if the top ten outperform the market after you've started watching them. If that's the case (which for top ten VCs it is), the math suggests it isn't a "million quarters" situation. Actually, it doesn't. The top 10 VCs aren't static and unchanging.
- Androider 11y ago
  Take 1000 people, have each predict a coin flip 10 times. The top 10 players will have predicted way better than random chance would have you believe. Why several of them are even 10 for 10, they must have special prediction powers! ;) Grow the player base, increase the number of predictions, you'll end up with some real super-stars who just go on winning. They'll probably write books and lecture about their techniques. Right up until the moment they lose. Kind of like hedge fund managers.
  - coryl 11y ago
    Enough time and volume should eventually show whose truly good (statistically).
    - deleted 11y ago
      [deleted]
    - Joof 11y ago
      Flip 1000 pennies and calculate the results enough times and you'll get a gausian curve. Some results will consistantly flip heads the majority of the time. It's harder to model with VC's because they are measured in rewards that get exponentially better with success (money) and are self-reinforcing (better deals from recognition). My guess is that they figured out how to eliminate the absolutely horrible ones and got lucky enough times to have the best deals come to them.
  - maaku 11y ago
    Explain Berkshire Hathaway for me then, please.
    - refurb 11y ago
      Berkshire doesn't just buy stock. It buys a controlling interest and influences the way the company is run.
      - mahyarm 11y ago
- sinatra 11y ago
  Well, there's also a self-fulfilling aspect when it comes to top ten VCs doing consistently well. Entrepreneurs and startups that are somewhat successful / proven can pick any VCs they want. And they pick the well respected (ie, historically successful) VCs.
  - sly010 11y ago
    Especially if top 10 is defined as "doing well" :)
- sl8r 11y ago
  Something I've often wondered about his how much of the top 10 VC performance advantage is due to deal availability. Top firms are offered the best deals (every startup wants to be funded by them), which means that they might be able to achieve better returns without being "better" than other VC firms in terms of, say, investing acumen or operational advice. It could be that 0% of top VC returns are explained by this; I'm curious, though.
  - coffeemug 11y ago
    > Something I've often wondered about his how much of the top 10 VC performance advantage is due to deal availability. My guess is, most of it.
- guelo 11y ago
  Is there enough public visibility into the top ten's deals to know that this is true?
- sliverstorm 11y ago
  Of course "better than random" is only worth something if the odds are decent, for example if random chance tends to yield $0 (no loss no gain).
- chongli 11y ago
  Texas sharpshooter fallacy[0]. The specific problem with your argument is that you didn't set forth a hypothesis that would predict which VCs would be successful before they'd all started investing their money. [0] https://en.wikipedia.org/wiki/Texas_sharpshooter_fallacy https://en.wikipedia.org/wiki/Texas_sharpshooter_fallacy
  - maurits 11y ago
    Don't think that applies, the rules or criteria for economic succes are set. Perhaps the comparison should be against the index.
    - notahacker 11y ago
      The point is that there's a relatively large number of VCs, a relatively wide distribution of returns and the pool of established VCs is skewed by those that don't enjoy early successes tending to be replaced with new VCs, irrespective of whether that was down to them being unluckier or less skilled than those which remain. If you have enough people flipping coins you're bound to end up with some people who appear to have significant skill in consistently flipping heads in your pool of coin flippers. (Especially if the pool tends to replace people who don't flip heads in their first couple of tries with new entrants) It's arguably the Texas sharpshooter fallacy because we define "top VCs" after the fact by looking at their past returns, rather than identifying the "most talented VCs" from a very early stage. Perhaps identifying the "crack shot" from a blindfolded firing squad would be a better analogy.
      - maurits 11y ago
        Sure, all true, thanks.
- ronlkah 11y ago
  A November 2015 Cambridge Associates study: "The widely held belief that 90% of venture industry performance is generated by just the top ten firms is a catchy but unsupported claim" http://www.cambridgeassociates.com/our-insights/research/venture-capital-disrupts-itself-breaking-the-concentration-curse/ http://www.cambridgeassociates.com/our-insights/research/ven...
6stringmerc 11y ago
The way you phrase this reminds me of what I studied happening in the hedge fund world, in that some of the 'top performer' funds only out-performed the market due to insider trading. Galleon (Raj - convicted), SAC (sanctioned), and probably a handful more that got spooked out of the avenue of enrichment. It almost seems - almost - like there may be a similar insular community whereby those who feel like piling in will only do so when it's a consensus movement play. You know, kind of like how Bernie Madoff took hundreds of millions from established, regulated entities because the "word on the street" was he was, well, just front-running. Though illegal, that was an acceptable explanation for the consistent returns that prolonged a dirty business model. Well, we've learned how that all turned out. Is there a moral to the story? Probably, but I'm not sure the startup culture would like to have to start questioning "angels" and their cohorts. YMMV.
- bduerst 11y ago
  There are people who willfully, knowingly invest in ponzi schemes, on the premise that they will try to get out before operator flees with the money because up until that point, it has outstanding returns.
  - deleted 11y ago
    [deleted]
- Estragon 11y ago
  It's fascinating to me that many startups put their crown jewels on github, a company with an inexplicably high valuation due to investments from some of the most successful VC companies. Don't they worry about exactly the kind of insider trading you're talking about, or worse? Same goes for slack.
  - davedx 11y ago
    "Crown jewels"? You mean a git repo? You know it's a matter of minutes to migrate between git repo hosting, right? :)
zaidf 11y ago
I wonder why Zuckerberg didn't buy the $40M stake personally. I'm guessing he was turned down.
- sokoloff 11y ago
  Why would he? He wanted the whole company and was spurned. What incentive would there be to then reward the founder with 2 commas of personal liquidity? Zuck's not trying to make small side investments personally that might enrich him but would certainly cause questions of conflict of interest with his CEO role at FB.
  - zaidf 11y ago
    Pretty sure the fb board wouldn't have a problem with Zuck getting any in into one of their top competitors. Zuck bleeds fb and a minority stake worth a fraction of his net worth isn't going to negatively impact his judgement. It's pretty common for companies to get minority stakes in competitors to get an in. Granted that is much more common in the public sector and sometimes sews the seed for a hostile takeover. This is why the snapchat board would never approve the deal; but the fb board would.
    - akg_67 11y ago
      > It's pretty common for companies to get minority stakes in competitors to get an in. Do you have an example of this? It will be conflict of interest and may bring anti-trust issues. No competitor will allow access to confidential information and board proceedings to be observed by competitor. I have only seen this happening when two companies settle some legal claims (ex: QTM-Data Domain) or form partnership (not competitors, ex: MSFT-FB) when one party is private/startup and other public. Typically public company will divest the stake when startup have IPO.
      - Hengjie 11y ago
        Yes. Porsche made cars but also purchased a stake in Volkswagen. http://priceonomics.com/porsche-the-hedge-fund-that-also-made-cars/ http://priceonomics.com/porsche-the-hedge-fund-that-also-mad...
gyardley 11y ago
It's not that hard to get some liquidity on the private market, as long as you're not selling quantities so large they can only be bought by a fund. Just work with a specialized broker who does this for a living, and they'll find the buyer for you. If your company's doing well enough, these brokers will even come looking for you.
- jacquesm 11y ago
  > If your company's doing well enough That is the key. And 'well enough' can be a pretty tough hurdle for your typical fast growing start-up-without-a-business-model. Even though it seems to be all about growth (which I disagree with in part) growth by itself does not pay the bills. So you may be firing on all pistons and still find that you can't sell your stock at all.
tomasien 11y ago
There are lots of businesses where it's really easy for founders to cash out - profitable businesses! I'm not even trying to be one of those HN commenters that bemoans the cashflow negative startup ecosystem (lots of ways to build a business), there are tons of profitable businesses whose founders cash out large amounts of stock regularly. The category of VC that wants founder secondary and the category of VC that likes loss leading consumer facing businesses are not well aligned.
serge2k 11y ago
and they would have an eaasier time getting rid of 200 million worth of private shares right?
- downandout 11y ago
  No, but it is reasonably likely that Snapchat will have a liquidity event at some point in the next couple of years.

coffeemug 11y ago

> This gives an interesting glimpse into the prognostication abilities of supposedly brilliant VC's. The question isn't whether VCs are brilliant according to some absolute metric. The question is whether they deploy capital better than random chance. The numbers show that top ten VCs consistently do.

fweespeech 11y ago
> The question isn't whether VCs are brilliant according to some absolute metric. The question is whether they deploy capital better than random chance. The numbers show that top ten VCs consistently do. Does it? If you have enough gamblers in a high stake casino where the house hasn't stacked the deck, some of them will seem to consistently win in comparison to the other players. Similarly, a very small percentage of VCs and other active investors consistently beat the market. A percentage so small I'm not sure anyone can statistically say they are doing so through skill. Similarly, your argument is the top 10 are consistent. Yes. And the top 10 aren't a statistically significant sample in a market of thousands of investors.
- coffeemug 11y ago
  This analysis breaks down if the top ten outperform the market after you've started watching them. If that's the case (which for top ten VCs it is), the math suggests it isn't a "million quarters" situation.
  - msellout 11y ago
    That would need to hold for substantially all of the "top" outperforming our expectation of a naive person with the same deal-flow.
  - tremguy 11y ago
    This.
  - fweespeech 11y ago
    > This analysis breaks down if the top ten outperform the market after you've started watching them. If that's the case (which for top ten VCs it is), the math suggests it isn't a "million quarters" situation. Actually, it doesn't. The top 10 VCs aren't static and unchanging.
Androider 11y ago
Take 1000 people, have each predict a coin flip 10 times. The top 10 players will have predicted way better than random chance would have you believe. Why several of them are even 10 for 10, they must have special prediction powers! ;) Grow the player base, increase the number of predictions, you'll end up with some real super-stars who just go on winning. They'll probably write books and lecture about their techniques. Right up until the moment they lose. Kind of like hedge fund managers.
- coryl 11y ago
  Enough time and volume should eventually show whose truly good (statistically).
  - deleted 11y ago
    [deleted]
  - Joof 11y ago
    Flip 1000 pennies and calculate the results enough times and you'll get a gausian curve. Some results will consistantly flip heads the majority of the time. It's harder to model with VC's because they are measured in rewards that get exponentially better with success (money) and are self-reinforcing (better deals from recognition). My guess is that they figured out how to eliminate the absolutely horrible ones and got lucky enough times to have the best deals come to them.
- maaku 11y ago
  Explain Berkshire Hathaway for me then, please.
  - refurb 11y ago
    Berkshire doesn't just buy stock. It buys a controlling interest and influences the way the company is run.
    - mahyarm 11y ago
sinatra 11y ago
Well, there's also a self-fulfilling aspect when it comes to top ten VCs doing consistently well. Entrepreneurs and startups that are somewhat successful / proven can pick any VCs they want. And they pick the well respected (ie, historically successful) VCs.
- sly010 11y ago
  Especially if top 10 is defined as "doing well" :)
sl8r 11y ago
Something I've often wondered about his how much of the top 10 VC performance advantage is due to deal availability. Top firms are offered the best deals (every startup wants to be funded by them), which means that they might be able to achieve better returns without being "better" than other VC firms in terms of, say, investing acumen or operational advice. It could be that 0% of top VC returns are explained by this; I'm curious, though.
- coffeemug 11y ago
  > Something I've often wondered about his how much of the top 10 VC performance advantage is due to deal availability. My guess is, most of it.
guelo 11y ago
Is there enough public visibility into the top ten's deals to know that this is true?
sliverstorm 11y ago
Of course "better than random" is only worth something if the odds are decent, for example if random chance tends to yield $0 (no loss no gain).
chongli 11y ago
Texas sharpshooter fallacy[0]. The specific problem with your argument is that you didn't set forth a hypothesis that would predict which VCs would be successful before they'd all started investing their money. [0] https://en.wikipedia.org/wiki/Texas_sharpshooter_fallacy https://en.wikipedia.org/wiki/Texas_sharpshooter_fallacy
- maurits 11y ago
  Don't think that applies, the rules or criteria for economic succes are set. Perhaps the comparison should be against the index.
  - notahacker 11y ago
    The point is that there's a relatively large number of VCs, a relatively wide distribution of returns and the pool of established VCs is skewed by those that don't enjoy early successes tending to be replaced with new VCs, irrespective of whether that was down to them being unluckier or less skilled than those which remain. If you have enough people flipping coins you're bound to end up with some people who appear to have significant skill in consistently flipping heads in your pool of coin flippers. (Especially if the pool tends to replace people who don't flip heads in their first couple of tries with new entrants) It's arguably the Texas sharpshooter fallacy because we define "top VCs" after the fact by looking at their past returns, rather than identifying the "most talented VCs" from a very early stage. Perhaps identifying the "crack shot" from a blindfolded firing squad would be a better analogy.
    - maurits 11y ago
      Sure, all true, thanks.
ronlkah 11y ago
A November 2015 Cambridge Associates study: "The widely held belief that 90% of venture industry performance is generated by just the top ten firms is a catchy but unsupported claim" http://www.cambridgeassociates.com/our-insights/research/venture-capital-disrupts-itself-breaking-the-concentration-curse/ http://www.cambridgeassociates.com/our-insights/research/ven...

6stringmerc 11y ago

The way you phrase this reminds me of what I studied happening in the hedge fund world, in that some of the 'top performer' funds only out-performed the market due to insider trading. Galleon (Raj - convicted), SAC (sanctioned), and probably a handful more that got spooked out of the avenue of enrichment. It almost seems - almost - like there may be a similar insular community whereby those who feel like piling in will only do so when it's a consensus movement play. You know, kind of like how Bernie Madoff took hundreds of millions from established, regulated entities because the "word on the street" was he was, well, just front-running. Though illegal, that was an acceptable explanation for the consistent returns that prolonged a dirty business model. Well, we've learned how that all turned out. Is there a moral to the story? Probably, but I'm not sure the startup culture would like to have to start questioning "angels" and their cohorts. YMMV.

bduerst 11y ago
There are people who willfully, knowingly invest in ponzi schemes, on the premise that they will try to get out before operator flees with the money because up until that point, it has outstanding returns.
- deleted 11y ago
  [deleted]
Estragon 11y ago
It's fascinating to me that many startups put their crown jewels on github, a company with an inexplicably high valuation due to investments from some of the most successful VC companies. Don't they worry about exactly the kind of insider trading you're talking about, or worse? Same goes for slack.
- davedx 11y ago
  "Crown jewels"? You mean a git repo? You know it's a matter of minutes to migrate between git repo hosting, right? :)

zaidf 11y ago

I wonder why Zuckerberg didn't buy the $40M stake personally. I'm guessing he was turned down.

sokoloff 11y ago
Why would he? He wanted the whole company and was spurned. What incentive would there be to then reward the founder with 2 commas of personal liquidity? Zuck's not trying to make small side investments personally that might enrich him but would certainly cause questions of conflict of interest with his CEO role at FB.
- zaidf 11y ago
  Pretty sure the fb board wouldn't have a problem with Zuck getting any in into one of their top competitors. Zuck bleeds fb and a minority stake worth a fraction of his net worth isn't going to negatively impact his judgement. It's pretty common for companies to get minority stakes in competitors to get an in. Granted that is much more common in the public sector and sometimes sews the seed for a hostile takeover. This is why the snapchat board would never approve the deal; but the fb board would.
  - akg_67 11y ago
    > It's pretty common for companies to get minority stakes in competitors to get an in. Do you have an example of this? It will be conflict of interest and may bring anti-trust issues. No competitor will allow access to confidential information and board proceedings to be observed by competitor. I have only seen this happening when two companies settle some legal claims (ex: QTM-Data Domain) or form partnership (not competitors, ex: MSFT-FB) when one party is private/startup and other public. Typically public company will divest the stake when startup have IPO.
    - Hengjie 11y ago
      Yes. Porsche made cars but also purchased a stake in Volkswagen. http://priceonomics.com/porsche-the-hedge-fund-that-also-made-cars/ http://priceonomics.com/porsche-the-hedge-fund-that-also-mad...

gyardley 11y ago

It's not that hard to get some liquidity on the private market, as long as you're not selling quantities so large they can only be bought by a fund. Just work with a specialized broker who does this for a living, and they'll find the buyer for you. If your company's doing well enough, these brokers will even come looking for you.

jacquesm 11y ago
> If your company's doing well enough That is the key. And 'well enough' can be a pretty tough hurdle for your typical fast growing start-up-without-a-business-model. Even though it seems to be all about growth (which I disagree with in part) growth by itself does not pay the bills. So you may be firing on all pistons and still find that you can't sell your stock at all.

tomasien 11y ago

There are lots of businesses where it's really easy for founders to cash out - profitable businesses! I'm not even trying to be one of those HN commenters that bemoans the cashflow negative startup ecosystem (lots of ways to build a business), there are tons of profitable businesses whose founders cash out large amounts of stock regularly. The category of VC that wants founder secondary and the category of VC that likes loss leading consumer facing businesses are not well aligned.

serge2k 11y ago

and they would have an eaasier time getting rid of 200 million worth of private shares right?

downandout 11y ago
No, but it is reasonably likely that Snapchat will have a liquidity event at some point in the next couple of years.