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b) You can't generalize having magical abilities to pick top quartile managers ex ante. a) Some bigger LPs diversify across multiple VC firms and smaller LPs m

by qwrusz 10y ago

b) You can't generalize having magical abilities to pick top quartile managers ex ante. a) Some bigger LPs diversify across multiple VC firms and smaller LPs may access fund of funds (though very expensive). Either way broad diversification across VC funds is not significant in the industry. One reason is because VC fund returns and broad exposure to multiple VCs is not really the main point here - it is the startups behind the VC layer that generate returns to LPs. Thus VC firms themselves are the conduit by which LPs get diversified exposure to the growth/returns of multiple startups, which is the goal for this asset class. Diversifying on top of your diversification gets expensive and impractical. I agree with you risk adjusting returns is important. Sharpe ratios would use standard deviation and historical returns. Of course caveat emptor "past performance does not necessarily predict future results." https://en.wikipedia.org/wiki/Sharpe_ratio https://en.wikipedia.org/wiki/Sharpe_ratio There is no official must do approach to looking at VC performance. In practice median and mean are both used, along with some other measures that look at consistency and write off ratios etc... For those interested one can google search for a professional VC analysis to see what they do. https://www.preqin.com https://www.preqin.com might have something not behind a paywall.

lpolovets 10y ago
b) Probably true, but in VC some of the top managers seem to be fairly consistent. I think that's one reason that LPs invest in emerging funds: if they hit the next Benchmark or Lowercase, that fund will soon be closed to new investors, so the only way to have an allocation is to be an early backer. a) I generally agree. I was just trying to illustrate why mean and median aren't great for analyzing asymmetric distributions.
- qwrusz 10y ago
  Well ya, if some VCs aren't open to new investors then LPs must invest with emerging managers. The extent to which top managers will revert to the mean is anyone's guess and years away from an answer. Why not just call it like it is...VC is really just a people business, there's money involved, but trying to quantify the process at all can be misleading. A VC firm is a small group of people (partners) using their best judgement and experience to find another group of people (founders) worth investing in. That's it, there's a ton of key man risk and there's no secret sauce. Lowercase and Matt Mazzeo are a great example: VCs are basically just like Hollywood talent agents who get to find the next movie stars and help them along a bit - but in VC they are finding the next big tech founders instead of actors. These are people businesses, numbers can't really capture it but they can distract. I didn't mean to get into a statistics debate on here. The great thing about VC and startups is everyone gets to be right until they're not :) Sidenote: I hear you guys are running one the best shops in the space. Congrats on the recent close. Best of luck to you and your portfolio co's.

by qwrusz 10y ago

lpolovets 10y ago

b) Probably true, but in VC some of the top managers seem to be fairly consistent. I think that's one reason that LPs invest in emerging funds: if they hit the next Benchmark or Lowercase, that fund will soon be closed to new investors, so the only way to have an allocation is to be an early backer. a) I generally agree. I was just trying to illustrate why mean and median aren't great for analyzing asymmetric distributions.

qwrusz 10y ago
Well ya, if some VCs aren't open to new investors then LPs must invest with emerging managers. The extent to which top managers will revert to the mean is anyone's guess and years away from an answer. Why not just call it like it is...VC is really just a people business, there's money involved, but trying to quantify the process at all can be misleading. A VC firm is a small group of people (partners) using their best judgement and experience to find another group of people (founders) worth investing in. That's it, there's a ton of key man risk and there's no secret sauce. Lowercase and Matt Mazzeo are a great example: VCs are basically just like Hollywood talent agents who get to find the next movie stars and help them along a bit - but in VC they are finding the next big tech founders instead of actors. These are people businesses, numbers can't really capture it but they can distract. I didn't mean to get into a statistics debate on here. The great thing about VC and startups is everyone gets to be right until they're not :) Sidenote: I hear you guys are running one the best shops in the space. Congrats on the recent close. Best of luck to you and your portfolio co's.