tag:blogger.com,1999:blog-12858245.post1426831065777700747..comments2024-01-09T21:59:59.860-08:00Comments on Will Price: VC Returns through 12/31/06Anonymoushttp://www.blogger.com/profile/07526077009135142958noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-12858245.post-15740534915840462842007-05-03T11:52:00.000-07:002007-05-03T11:52:00.000-07:00Will,Interesting post. Few VCs I've met tend to t...Will,<BR/><BR/>Interesting post. Few VCs I've met tend to think in public market risk/reward terms, but alpha is ultimately what we are all after.<BR/><BR/>A few thoughts:<BR/>1. As you point out, the lack of transparency in the VC market makes constructing a reasonable benchmark even more difficult. VC returns are generally thought to be highly correlated with the performance of the Nasdaq, and the level of risk (in beta terms) is very difficult to quantify. As a result, the real yardstick should be a risk-adjusted benchmark, akin to levering up the S&P500 to achieve a similar beta. As David Swensen of Yale pointed out (<A HREF="http://www.amazon.com/Pioneering-Portfolio-Management-Unconventional-Institutional/dp/0684864436" REL="nofollow">Pioneering Portfolio Management</A>), a risk-adjusted S&P 500 benchmark has wildly outperformed most private equity portfolios.<BR/>2. Worse still, there is a tremendous survivorship bias in private equity data, making true asset-class risk and return difficult to estimate over long periods.<BR/>3. Institutionalized venture capital portfolios have really only existed in size during a period of general market expansion (the bull market and general multiple expansion since 1982). As a result, we really don't know how this asset class will perform in severely troubled periods.<BR/>4. Research has also indicated that VC/PE returns are highly skewed (75% of all VC funds are average or below, so only 25% or so are really outperforming, with the top 1% outperforming massively) and generally serially correlated--past performance does indicate future results. This is obviously a strong argument for investing in/working at top funds with a proven track record.<BR/>5. Too much money can destroy even the best results--not because it clouds the judgment or impairs the deal flow of top VCs, but because it reduces returns to all involved as prices are bid up. As Buffett has said, even in buying a great company, a bad price can make for a bad investment.<BR/><BR/>Enjoying your blog, and definitely looking forward to reading other interesting posts in the future.<BR/><BR/>DavidAnonymousnoreply@blogger.com