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Unpopular opinion: it really doesn't matter what VCs do or don't do. Most VCs dreadfully under-perform the market. The rate of VC success is mostly related to c

Unpopular opinion: it really doesn't matter what VCs do or don't do. Most VCs dreadfully under-perform the market. The rate of VC success is mostly related to chance or some unfair advantage in getting into early winners. Most VCs are awful. Meet with them in person, not in person, it doesn't matter. I treat advice from VCs pretty much the same as a random money manager. Maybe what they're saying makes sense, maybe not, but it doesn't deserve any heavy weight. The 80/20 rule applies heavily to VCs. A very small number of VCs are responsible for the majority of returns. The rest are just chasing deals around. Chase in person. Chase not in person. It really doesn't matter.

4636760295 6y ago
*most VCs dreadfully underperform. Even the top performers don't do so well once you factor in fees and everything else.
- ISL 6y ago
  Do VCs charge themselves fees?
  - adambyrtek 6y ago
    VCs invest money raised from LPs (limited partners) and usually charge an annual fee on assets under management and also get a share of any profits.
  - dpoochieni 6y ago
    If its anything like private equity (bigger company VC's), they charge their limited partners an annual fee. Around 1 or 2%
  - rexreed 6y ago
    You should read this: https://hbr.org/2013/05/six-myths-about-venture-capitalists https://hbr.org/2013/05/six-myths-about-venture-capitalists "the standard VC fund charges an annual fee of 2% on committed capital over the life of the fund—usually 10 years—plus a percentage of the profits when firms successfully exit, usually by being acquired or going public. So a firm that raised a $1 billion fund and charged a 2% fee would receive a fixed fee stream of $20 million a year to cover expenses and compensation. VC firms raise new funds about every three or four years, so let’s say that three years into the first fund, the firm raised a second $1 billion fund. That would generate an additional $20 million in fees, for a total of $40 million annually. These cumulative and guaranteed management fees insulate VC partners from poor returns because much of their compensation comes from fees. Many partners take home compensation in the seven figures regardless of the fund’s investment performance. Most entrepreneurs have no such safety net. " Yup, those high-flying VCs? making money the same way money managers too - taking a cut of assets under management (AUM). Nothing to do with their investment prowess -- just gather lots of money, take a cut of that gathering, and whether or not the investors make money won't impact your paycheck. yes there's a nice bonus if you make it, but that's not necessary. That's how the 80% of VCs that don't generate substantial returns are making a living.
titanomachy 6y ago
I mean, it matters to the people trying to get funding from them.
- rexreed 6y ago
  But it really doesn't. You'll meet with an investor if they want to meet with you in person. You'll meet with an investor virtually if they want to meet with you virtually. What one investor does vs. another doesn't matter. So the advice given here is meaningful for... who? I guess it's for other VCs that give the OP a hard time about not meeting in person. But really, it doesn't matter because they'll all do a relatively crappy job of giving returns to their investors anyways. The only time it really matters is when you're meeting with the VCs that are actually making big returns. For them, take the meeting any way they want to have it. In person or not.
GuiA 6y ago
This insight is somewhat echoed in the post itself: "At the end of the day, doing VC right is actually much more about portfolio construction and modeling than picking." (with a link to https://medium.com/ulu-ventures/successful-vcs-need-at-least-one-outlier-to-have-a-well-performing-fund-c122c799dfb3 https://medium.com/ulu-ventures/successful-vcs-need-at-least...)
andreas_mauer 6y ago
Do you have any source for "Most VCs dreadfully under-perform the market".
- rexreed 6y ago
  A few places talk about the returns of most VC firms * https://blog.wealthfront.com/venture-capital-economics/ https://blog.wealthfront.com/venture-capital-economics/ "Over the past 10 years, venture capital in general has been a lousy place to invest. According to Cambridge Associates the average annual venture capital return over the past 10 years has only been 8.1% as compared to 5.7% for the S&P 500. That clearly does not compensate the limited partner for taking the increased risk associated with venture capital. However the top quartile (25%) generated an annual rate of return of 22.9%. The top 20 firms have done even better." * https://techcrunch.com/2017/06/01/the-meeting-that-showed-me-the-truth-about-vcs/ https://techcrunch.com/2017/06/01/the-meeting-that-showed-me... "A VC fund needs a 3x return to achieve a “venture rate of return” and be considered a good investment ($100 million fund => 3x => $300 million return). The graph below shows what percentage of VC firms accomplish this. As we can see, only the small green slice is bringing it home. The other 95 percent are juggling somewhere between breaking even and downright losing money (remember to adjust for inflation)." [See chart which shows that only 5% of VC firms return more than 3x, and a full 50% of firms return LESS than the money invested in them.] Also see Slide 14 in deck in comment posted above (https://news.ycombinator.com/item?id=23435889 https://news.ycombinator.com/item?id=23435889)
  - andreas_mauer 6y ago
    Basically both articles said that VCs generate more returns than the S&P.
    - rexreed 6y ago
      As a group. But not individually. That's the point. It would be like saying that mutual funds in a category might outperform the market but individually 80% of them don't. Unfortunately you can't invest in VCs as a group. There's no index fund of VCs. So you have to pick individual ones. 95% of those underperform the S&P.
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networkimprov 6y ago
This page has a chart comparing S&P 500 to other modes. Looks like VC tracks it rather closely. https://www.toptal.com/finance/venture-capital-consultants/state-of-venture-capital-industry-2019 https://www.toptal.com/finance/venture-capital-consultants/s... Sorry, couldn't find a chart giving just the bottom 80% of VCs :-)
- rexreed 6y ago
  This chart shows that only 5% of the VCs are generating most of the returns, and 50% of VC firms can't even return the capital that's invested in them: https://techcrunch.com/2017/06/01/the-meeting-that-showed-me-the-truth-about-vcs/ https://techcrunch.com/2017/06/01/the-meeting-that-showed-me... From the article: "“Ninety-five percent of VCs aren’t profitable,” he said. It took me a while to understand what this really means." Basically, the default mode for VCs is to either lose the money investors put in them or modest returns, which isn't particularly good given the risk of the investment class. 80%+ of the VCs you'll talk to underperform the S&P. Those general returns you see? They come from a handful of VCs, who will be much more selective. Basically you can't approach them, they'll approach you since they know they are the kingmakers in the industry. * Also, check Slide 14 in this deck: https://www.slideshare.net/gilbenartzy/money-talks-things-you-learn-after-77-investment-rounds https://www.slideshare.net/gilbenartzy/money-talks-things-yo... - The Top 20 VC funds, which represent 2% of all VC Funds, generate 95% of all VC returns - 50% of VC firms return less than 1x of invested capital - An additional 35% of VC firms return less than 2x of invested capital So yeah, it's even worse than 80/20 rule. 9 out of every 10 VC firms you talk to will most likely be loser funds that don't generate substantial returns. Focus on the top 20 VC funds if you want to be in with the real winners. For everyone else, they're just money managers, mostly losing their investor's money, but pretending like they're kingmakers.
  - sk5t 6y ago
    Do you feel it's the VC's responsibility to carry you and make your startup successful? Or is their role to provide funds, and possibly some introductions and guidance, and let the chips fall where they may?
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4636760295 6y ago

*most VCs dreadfully underperform. Even the top performers don't do so well once you factor in fees and everything else.

ISL 6y ago
Do VCs charge themselves fees?
- adambyrtek 6y ago
  VCs invest money raised from LPs (limited partners) and usually charge an annual fee on assets under management and also get a share of any profits.
- dpoochieni 6y ago
  If its anything like private equity (bigger company VC's), they charge their limited partners an annual fee. Around 1 or 2%
- rexreed 6y ago
  You should read this: https://hbr.org/2013/05/six-myths-about-venture-capitalists https://hbr.org/2013/05/six-myths-about-venture-capitalists "the standard VC fund charges an annual fee of 2% on committed capital over the life of the fund—usually 10 years—plus a percentage of the profits when firms successfully exit, usually by being acquired or going public. So a firm that raised a $1 billion fund and charged a 2% fee would receive a fixed fee stream of $20 million a year to cover expenses and compensation. VC firms raise new funds about every three or four years, so let’s say that three years into the first fund, the firm raised a second $1 billion fund. That would generate an additional $20 million in fees, for a total of $40 million annually. These cumulative and guaranteed management fees insulate VC partners from poor returns because much of their compensation comes from fees. Many partners take home compensation in the seven figures regardless of the fund’s investment performance. Most entrepreneurs have no such safety net. " Yup, those high-flying VCs? making money the same way money managers too - taking a cut of assets under management (AUM). Nothing to do with their investment prowess -- just gather lots of money, take a cut of that gathering, and whether or not the investors make money won't impact your paycheck. yes there's a nice bonus if you make it, but that's not necessary. That's how the 80% of VCs that don't generate substantial returns are making a living.

titanomachy 6y ago

I mean, it matters to the people trying to get funding from them.

rexreed 6y ago
But it really doesn't. You'll meet with an investor if they want to meet with you in person. You'll meet with an investor virtually if they want to meet with you virtually. What one investor does vs. another doesn't matter. So the advice given here is meaningful for... who? I guess it's for other VCs that give the OP a hard time about not meeting in person. But really, it doesn't matter because they'll all do a relatively crappy job of giving returns to their investors anyways. The only time it really matters is when you're meeting with the VCs that are actually making big returns. For them, take the meeting any way they want to have it. In person or not.

GuiA 6y ago

This insight is somewhat echoed in the post itself: "At the end of the day, doing VC right is actually much more about portfolio construction and modeling than picking." (with a link to https://medium.com/ulu-ventures/successful-vcs-need-at-least-one-outlier-to-have-a-well-performing-fund-c122c799dfb3 https://medium.com/ulu-ventures/successful-vcs-need-at-least...)

andreas_mauer 6y ago

Do you have any source for "Most VCs dreadfully under-perform the market".

rexreed 6y ago
A few places talk about the returns of most VC firms * https://blog.wealthfront.com/venture-capital-economics/ https://blog.wealthfront.com/venture-capital-economics/ "Over the past 10 years, venture capital in general has been a lousy place to invest. According to Cambridge Associates the average annual venture capital return over the past 10 years has only been 8.1% as compared to 5.7% for the S&P 500. That clearly does not compensate the limited partner for taking the increased risk associated with venture capital. However the top quartile (25%) generated an annual rate of return of 22.9%. The top 20 firms have done even better." * https://techcrunch.com/2017/06/01/the-meeting-that-showed-me-the-truth-about-vcs/ https://techcrunch.com/2017/06/01/the-meeting-that-showed-me... "A VC fund needs a 3x return to achieve a “venture rate of return” and be considered a good investment ($100 million fund => 3x => $300 million return). The graph below shows what percentage of VC firms accomplish this. As we can see, only the small green slice is bringing it home. The other 95 percent are juggling somewhere between breaking even and downright losing money (remember to adjust for inflation)." [See chart which shows that only 5% of VC firms return more than 3x, and a full 50% of firms return LESS than the money invested in them.] Also see Slide 14 in deck in comment posted above (https://news.ycombinator.com/item?id=23435889 https://news.ycombinator.com/item?id=23435889)
- andreas_mauer 6y ago
  Basically both articles said that VCs generate more returns than the S&P.
  - rexreed 6y ago
    As a group. But not individually. That's the point. It would be like saying that mutual funds in a category might outperform the market but individually 80% of them don't. Unfortunately you can't invest in VCs as a group. There's no index fund of VCs. So you have to pick individual ones. 95% of those underperform the S&P.

deleted 6y ago

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networkimprov 6y ago

This page has a chart comparing S&P 500 to other modes. Looks like VC tracks it rather closely. https://www.toptal.com/finance/venture-capital-consultants/state-of-venture-capital-industry-2019 https://www.toptal.com/finance/venture-capital-consultants/s... Sorry, couldn't find a chart giving just the bottom 80% of VCs :-)

rexreed 6y ago
This chart shows that only 5% of the VCs are generating most of the returns, and 50% of VC firms can't even return the capital that's invested in them: https://techcrunch.com/2017/06/01/the-meeting-that-showed-me-the-truth-about-vcs/ https://techcrunch.com/2017/06/01/the-meeting-that-showed-me... From the article: "“Ninety-five percent of VCs aren’t profitable,” he said. It took me a while to understand what this really means." Basically, the default mode for VCs is to either lose the money investors put in them or modest returns, which isn't particularly good given the risk of the investment class. 80%+ of the VCs you'll talk to underperform the S&P. Those general returns you see? They come from a handful of VCs, who will be much more selective. Basically you can't approach them, they'll approach you since they know they are the kingmakers in the industry. * Also, check Slide 14 in this deck: https://www.slideshare.net/gilbenartzy/money-talks-things-you-learn-after-77-investment-rounds https://www.slideshare.net/gilbenartzy/money-talks-things-yo... - The Top 20 VC funds, which represent 2% of all VC Funds, generate 95% of all VC returns - 50% of VC firms return less than 1x of invested capital - An additional 35% of VC firms return less than 2x of invested capital So yeah, it's even worse than 80/20 rule. 9 out of every 10 VC firms you talk to will most likely be loser funds that don't generate substantial returns. Focus on the top 20 VC funds if you want to be in with the real winners. For everyone else, they're just money managers, mostly losing their investor's money, but pretending like they're kingmakers.
- sk5t 6y ago
  Do you feel it's the VC's responsibility to carry you and make your startup successful? Or is their role to provide funds, and possibly some introductions and guidance, and let the chips fall where they may?

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