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Is there evidence of fund returns non-correlated to the public markets? Big IPOs in down markets? I see a lot of dot-bomb kinds of things, and the latest IPOs

Is there evidence of fund returns non-correlated to the public markets? Big IPOs in down markets? I see a lot of dot-bomb kinds of things, and the latest IPOs have been taking full advantage of the froth in the public markets. It's hard to imagine Snapchat making a go of it without the current stock pricing being so lenient.

birken 9y ago
These VCs have some interesting data about that: http://blog.ttcp.com/the-inverse-correlation-between-venture-and-public-markets/ http://blog.ttcp.com/the-inverse-correlation-between-venture... I'm not sure I agree with them or their particularly analysis, but I'm very convinced they are different because the way I see it, VC and the public markets are completely different things. It's like the farm system for baseball teams. VC is investing in the upcoming prospects, and the VC is investing in the existing major leaguers. Sometimes you'll have a farm system full of A+++ prospects that pay off huge (Google, Facebook), and sometimes you won't (pick a 5 year period where there were no massive VC payouts). And obviously the returns on those prospects will only go to whatever team they happened to be on (which VC picked them), whereas public market returns can go to anybody. But they are different companies at different ages doing different things. Thus to me it would be quite surprising if their returns were all that correlated. And at some sense "froth" is irrelevant. A VC doesn't have to sell their Facebook or Google stock when it IPOs, they can hold onto it as long as they like. They are basically investing for the chance to get that amazing stock at a huge discount by getting it at the "prospect" stage, and once it goes public they can ride the public market waves as well.
- rlucas 9y ago
  Very good point about farm league and doing different things -- but it's not clearly the case that a VC can hold onto their Facebook or Google stock. Generally, there are restrictions in the LP agreements that may limit the amount of the fund that is in publicly-traded securities. There may also be requirements for distribution to the limited partners of public-traded securities. VCs are paid to make illiquid private investments and massage them through to the point that they are liquid (cash, or marketable securities). LP investors, as a whole, are less than sanguine on the VCs subsequently becoming public markets equities horse-bettors.
  - birken 9y ago
    That is interesting. I did always wonder at what point the VCs transfer the returns of post-IPO shares to their LPs, because it seems like the timing on this can make a huge difference to the VCs return. Especially if the majority of your funds return is going to be concentrated in a few companies stock. Seems like it could make a big difference on what the carry is going to be which might make some weird incentives for the VCs. I was basing my comment on something a Sequoia partner said that they'd never sold a share of their Google stock, but that might have been their own personal investment (or frankly I have no idea how it works -- do LPs always get cash as returns or do they get shares of the post-IPO stock?).
    - jacquesm 9y ago
      > do LPs always get cash as returns Unless a special deal is arranged it is cash in, cash out.

birken 9y ago

These VCs have some interesting data about that: http://blog.ttcp.com/the-inverse-correlation-between-venture-and-public-markets/ http://blog.ttcp.com/the-inverse-correlation-between-venture... I'm not sure I agree with them or their particularly analysis, but I'm very convinced they are different because the way I see it, VC and the public markets are completely different things. It's like the farm system for baseball teams. VC is investing in the upcoming prospects, and the VC is investing in the existing major leaguers. Sometimes you'll have a farm system full of A+++ prospects that pay off huge (Google, Facebook), and sometimes you won't (pick a 5 year period where there were no massive VC payouts). And obviously the returns on those prospects will only go to whatever team they happened to be on (which VC picked them), whereas public market returns can go to anybody. But they are different companies at different ages doing different things. Thus to me it would be quite surprising if their returns were all that correlated. And at some sense "froth" is irrelevant. A VC doesn't have to sell their Facebook or Google stock when it IPOs, they can hold onto it as long as they like. They are basically investing for the chance to get that amazing stock at a huge discount by getting it at the "prospect" stage, and once it goes public they can ride the public market waves as well.

rlucas 9y ago
Very good point about farm league and doing different things -- but it's not clearly the case that a VC can hold onto their Facebook or Google stock. Generally, there are restrictions in the LP agreements that may limit the amount of the fund that is in publicly-traded securities. There may also be requirements for distribution to the limited partners of public-traded securities. VCs are paid to make illiquid private investments and massage them through to the point that they are liquid (cash, or marketable securities). LP investors, as a whole, are less than sanguine on the VCs subsequently becoming public markets equities horse-bettors.
- birken 9y ago
  That is interesting. I did always wonder at what point the VCs transfer the returns of post-IPO shares to their LPs, because it seems like the timing on this can make a huge difference to the VCs return. Especially if the majority of your funds return is going to be concentrated in a few companies stock. Seems like it could make a big difference on what the carry is going to be which might make some weird incentives for the VCs. I was basing my comment on something a Sequoia partner said that they'd never sold a share of their Google stock, but that might have been their own personal investment (or frankly I have no idea how it works -- do LPs always get cash as returns or do they get shares of the post-IPO stock?).
  - jacquesm 9y ago
    > do LPs always get cash as returns Unless a special deal is arranged it is cash in, cash out.