4 ms·

So if 2/3 of the funds income is from the management fee, wouldn't that mean that the average VC fund clearly underperforms the market?

harveyesq 7y ago
Bingo
fnord123 7y ago
If management fees are 2/3 of the fund's income then the management is twice the performance fee. Given value of fund at start (f_0) and value of fund after a time period (f_1) then the value is: 0.02f_1 = 2( 0.2 ( f_1 - f_0)) f_1 = 20 (f_1 - f_0) 20 f_0 = 19 f_1 f_0 = 0.95 f_1 f_1 = 1.053 f_0 So management fee is 2/3 of the income if the performance is 5.3%. SPY performance is all over the place[0] but you can see years with 10% or 20% growth. But check my math because I'm a moron. [0] https://finance.yahoo.com/quote/SPY/performance/ https://finance.yahoo.com/quote/SPY/performance/
- xorfish 7y ago
  So depending on how carry is calculated that would be 4.24% or 2.24% performance per year. That is far below the average return of the market.
notfromhere 7y ago
There was a Kaiser(? maybe someone else) that over a 20-30 year period, most VCs don't return capital. Your average VC fund absolutely underperforms, and even the "good" funds sometimes just get lucky and run with that until the good will runs out. Andreessen's 2010-11 funds have underperformed the market.
- WooShoa 7y ago
  I find it interesting when people make a fundamental miscalculation like you did. They perform EXCEPTIONALLY well … when you start understanding who they are performing for. Gold rush … something, something … shovels. But I know. I know. I speak heresy on this site. I repent and beg for forgiveness for saying the kind has no clothes on.
  - twoheadedboy 7y ago
    So who are the shovel manufacturers in this case?
  - notfromhere 7y ago
    They're great for the VCs who want to harvest management fees, but not-great for the institutions who put their cash in. The real question is: as a society should we give 2/20 to people who spend most of their time wasting time on twitter and quoting Sapiens to each other?
paulddraper 7y ago
Just like most start-ups underperform the market. But then you get some rocket ships. And everyone (LP, VC) thinks they can pick the future rocket ships (VC, startup). Maybe some of them can.

harveyesq 7y ago

Bingo

fnord123 7y ago

If management fees are 2/3 of the fund's income then the management is twice the performance fee. Given value of fund at start (f_0) and value of fund after a time period (f_1) then the value is: 0.02f_1 = 2( 0.2 ( f_1 - f_0)) f_1 = 20 (f_1 - f_0) 20 f_0 = 19 f_1 f_0 = 0.95 f_1 f_1 = 1.053 f_0 So management fee is 2/3 of the income if the performance is 5.3%. SPY performance is all over the place[0] but you can see years with 10% or 20% growth. But check my math because I'm a moron. [0] https://finance.yahoo.com/quote/SPY/performance/ https://finance.yahoo.com/quote/SPY/performance/

xorfish 7y ago
So depending on how carry is calculated that would be 4.24% or 2.24% performance per year. That is far below the average return of the market.

notfromhere 7y ago

There was a Kaiser(? maybe someone else) that over a 20-30 year period, most VCs don't return capital. Your average VC fund absolutely underperforms, and even the "good" funds sometimes just get lucky and run with that until the good will runs out. Andreessen's 2010-11 funds have underperformed the market.

WooShoa 7y ago
I find it interesting when people make a fundamental miscalculation like you did. They perform EXCEPTIONALLY well … when you start understanding who they are performing for. Gold rush … something, something … shovels. But I know. I know. I speak heresy on this site. I repent and beg for forgiveness for saying the kind has no clothes on.
- twoheadedboy 7y ago
  So who are the shovel manufacturers in this case?
- notfromhere 7y ago
  They're great for the VCs who want to harvest management fees, but not-great for the institutions who put their cash in. The real question is: as a society should we give 2/20 to people who spend most of their time wasting time on twitter and quoting Sapiens to each other?

paulddraper 7y ago

Just like most start-ups underperform the market. But then you get some rocket ships. And everyone (LP, VC) thinks they can pick the future rocket ships (VC, startup). Maybe some of them can.