Additional Thoughts
- Picking good VC managers (“GPs”) is hard.
- The data that supports various selection heuristics is weak: while I like the NBER (Harris, Jenkinson, …) paper and dislike the Kauffman paper, there’s likely a lot of omission/survivorship bias in the NBER paper (an issue for most research papers…). Also, a PME that’s just above 1 would likely disappoint many LPs given the illiquidity of VC funds and the required work for an LP to build a portfolio of funds.
- I also think it’s much harder to predict future returns for VC than it is for other asset classes, which is already hard:
- Equities is easier because many public companies have product-market-fit, revenue, are profitable, and offer yield to investors.
- However, terminal value is a large % of most stocks’ value, especially in a low-rate world. The ceiling for terminal value is also unbounded.
- Fixed income is much easier because it’s mainly yield over a defined term. And the ceiling is bounded.
- See Alex Danco (also above) and Jerry Neumann for why predicting VC/start-up outcomes is hard.
- Equities is easier because many public companies have product-market-fit, revenue, are profitable, and offer yield to investors.
- Consequently, investors who allocate to VC should probably build portfolios with many GPs. If they can’t, perhaps because it’s a lot of work to allocate to numerous GPs while trying to avoid the more obviously bad/future fourth quartile ones, then invest via a FoF or allocate to a platform like YC that invests in a gazillion early-stage companies (which captures VC beta pretty well).