One question: "Is past performance ... a very good indicator of future success."?
Intuitively, that makes sense. But with 10+ year funding cycles, it's difficult to say definitively.
Counterpoints:
1. Emerging venture fund managers often have the best returns: "First-time managers outperformed experienced managers for 2006-2014 vintage venture capital funds"
• The median net IRR for 2006-2014 vintage first-time venture capital funds (+12.9%) sits a full 3% points higher than that of experienced managers (+9.9%), with risk levels (measured by standard deviation of net IRR) at 19.1% and 15.6% respectively. 13 of 16 years measured from 2000-2016, first time fund managers performed better, on average, than their older vintage counterparts. See https://docs.preqin.com/reports/Preqin-Special-Report-Up-and-Away-Launching-First-Time-Venture-Capital-Fund-November-2017.pdf
2. Also, how long a manager is in the VC game does not seem to correlate with better returns:
Agree that new managers outperform, but from an LP perspective they are also likely to be viewed as a riskier bet (due to availability bias of founders when they think about who to take money from).
Whilst the performance of fund managers like sequoia, benchmark, kleiner perkins and union square may not be top 5 for every fund, they are pretty consistent top quartile performers.
Marketing plays a significant role, for sure. And yes, there will be survivorship bias for anyone's performance over 10+ years, but we're starting to see cracks in the system:
"[T]oday’s mkt is not…20yrs ago. Broad-based value creation means success [isn't] limited to a handful of (inaccessible) funds...new & developing funds consistently rank as best performers." https://twitter.com/ROIChristie/status/1220442261009453057
The divide seems to be in the data collection methods. Apparently, Pitchbook leans more favorable to larger, more institutional-backed funds than it does over Cambridge, which apparently tends to favor newer funds. https://twitter.com/trengriffin/status/1221430857216348161?s=20
Not sure who is correct but the allocations for LPs aren't large enough for them to really throw some resources at the problem.
Later stage Fund cash multiples will be lower than earlier stage. Older VCs tend to raise larger and larger funds. Ergo, emerging VCs often have smaller funds but with higher return multiples..?
Love the format!
One question: "Is past performance ... a very good indicator of future success."?
Intuitively, that makes sense. But with 10+ year funding cycles, it's difficult to say definitively.
Counterpoints:
1. Emerging venture fund managers often have the best returns: "First-time managers outperformed experienced managers for 2006-2014 vintage venture capital funds"
• The median net IRR for 2006-2014 vintage first-time venture capital funds (+12.9%) sits a full 3% points higher than that of experienced managers (+9.9%), with risk levels (measured by standard deviation of net IRR) at 19.1% and 15.6% respectively. 13 of 16 years measured from 2000-2016, first time fund managers performed better, on average, than their older vintage counterparts. See https://docs.preqin.com/reports/Preqin-Special-Report-Up-and-Away-Launching-First-Time-Venture-Capital-Fund-November-2017.pdf
2. Also, how long a manager is in the VC game does not seem to correlate with better returns:
https://twitter.com/ChrisHarveyEsq/status/1264410418929258496?s=20
Am I missing anything?
Great points, Chris!
Agree that new managers outperform, but from an LP perspective they are also likely to be viewed as a riskier bet (due to availability bias of founders when they think about who to take money from).
Whilst the performance of fund managers like sequoia, benchmark, kleiner perkins and union square may not be top 5 for every fund, they are pretty consistent top quartile performers.
https://www.google.com/amp/s/www.valuewalk.com/2014/07/consistent-performing-private-equity-fund-managers-2014/%3famp
Our argument is that you need to be a good marketer to overcome these challenges.
Marketing plays a significant role, for sure. And yes, there will be survivorship bias for anyone's performance over 10+ years, but we're starting to see cracks in the system:
"[T]oday’s mkt is not…20yrs ago. Broad-based value creation means success [isn't] limited to a handful of (inaccessible) funds...new & developing funds consistently rank as best performers." https://twitter.com/ROIChristie/status/1220442261009453057
The divide seems to be in the data collection methods. Apparently, Pitchbook leans more favorable to larger, more institutional-backed funds than it does over Cambridge, which apparently tends to favor newer funds. https://twitter.com/trengriffin/status/1221430857216348161?s=20
Not sure who is correct but the allocations for LPs aren't large enough for them to really throw some resources at the problem.
https://twitter.com/Beezer232/status/1221189124914155521?s=20
Anyways, my whole point is that "past performance ... [IS NOT] a very good indicator of future success." But reasonable minds can differ!
Cheers,
Chris
Hmm it seems we stand corrected!
Don’t you need to take into account fund sizes?
Later stage Fund cash multiples will be lower than earlier stage. Older VCs tend to raise larger and larger funds. Ergo, emerging VCs often have smaller funds but with higher return multiples..?
Yep good point, it definitely seems to be a significant factor. Diminishing returns to scale seem to be consistent...