21–30 of 46 posts
If it's already a success in a global market, with a complete team, a fully complete product, clearly making plenty of money with tens of thousands of paying customers (we'd really prefer to see millions) and all risk removed then WE INVEST!
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Excuse my limited knowledge of statistics, but I thought the mean is considered an improper metric for the "average" value of asymmetric distributions. If not mean, nor median, what metric would you suggest to approximate a typical value?
Let's say that for a basket of 100 VC funds: * 30 return 0.5X (i.e. half of the initial investment) * 30 return 1X * 25 return 3X * 10 return 6X * 4 return 10X * 1 returns 20X The fund class overall returns 2.4X, but the median fund is very underwhelming (investors just get their money back). The "average" fund return (2.4x) is also kind of underwhelming because that's so much worse than the top funds. However, if an…
a) Some bigger LPs diversify across multiple VC firms and smaller LPs may access fund of funds (though very expensive). Either way broad diversification across VC funds is not significant in the industry. One reason is because VC fund returns and broad exposure to multiple VCs is not really the main point here - it is the startups behind the VC layer that generate returns to LPs. Thus VC firms themselves are the conduit by which LPs get diversified exposure to the growth/returns of multiple startups, which is the goal for this asset class. Diversifying on top of your diversification gets expensive and impractical.
I agree with you risk adjusting returns is important. Sharpe ratios would use standard deviation and historical returns. Of course caveat emptor "past performance does not necessarily predict future results." https://en.wikipedia.org/wiki/Sharpe_ratio
There is no official must do approach to looking at VC performance. In practice median and mean are both used, along with some other measures that look at consistency and write off ratios etc...
For those interested one can google search for a professional VC analysis to see what they do. https://www.preqin.com might have something not behind a paywall.
Earlier quoted context omitted.
Excuse my limited knowledge of statistics, but I thought the mean is considered an improper metric for the "average" value of asymmetric distributions. If not mean, nor median, what metric would you suggest to approximate a typical value?
Due to the law of large numbers (LLN, either the weak or the strong version), the mean is what matters, and the median, mode, etc. don't. E.g., in coin flipping, if assign 0 to heads and 1 to tails and flip coins for a long time and take the empirical average, then that average coverges to the mean of 0 and 1, that is, 1/2. Of course, here the 1/2 is not even a typical value. Similarly, to estimate what a venture fir…
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median is wrong metric for an asymmetric distribution.
That's reasonable at a fund level, but when 50% of the firms have negative returns why do people use them?
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That's reasonable at a fund level, but when 50% of the firms have negative returns why do people use them?
Well, more than 50% of the companies have negative returns in the public market. So why do people invest in the public markets? For LPs, investing in VC firms is just to way to diversify and invest in private markets.
Earlier quoted context omitted.
That's reasonable at a fund level, but when 50% of the firms have negative returns why do people use them?
Well, more than 50% of the companies have negative returns in the public market. So why do people invest in the public markets? For LPs, investing in VC firms is just to way to diversify and invest in private markets.
On page 2, the paper has > In fact, Kaplan and Stromberg (2001) and Gompers and Lerner (2001) argue that VCs are particularly successful at solving an important problem in market economies|connecting entrepreneurs with good ideas (but no money) with investors who have money (but no ideas). IMHO, for information technology (IT) venture capitalists (VCs), this statement about "ideas" is mostly wrong. One reason the st…