For reliable excess returns, VC funds need 500 investments
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For reliable excess returns, VC funds need 500 investments
1–10 of 68 posts
Re: For reliable excess returns, VC funds need 500 investments
#2Tail winds for YC and other diversified startup investors.
Re: For reliable excess returns, VC funds need 500 investments
#3My takeaways from the article: (1) VC is a casino for the rich and just like gamblers in casinos they have no idea what they are doing; (2) VCs have discovered that standard deviation shrinks like the square root of the sample size, however their understanding of stats seems to be just enough to run a monte-carlo simulation.
Edit: the 3rd takeaway is advice to those who're considering to join a "startup" - if VC needs 500 investments to make a 15% return on average, you need 5000 years to get the sames returns as a line worker.
Re: For reliable excess returns, VC funds need 500 investments
#4Takes a lot of samples to converge to the mean of a fat tailed distribution.
Re: For reliable excess returns, VC funds need 500 investments
#5On the upside, that means a lot more founders are given the chance to test out their ideas. That should hopefully lead to more experimentation and faster iteration of ideas in general.
Re: For reliable excess returns, VC funds need 500 investments
#6I think this is pretty much what PG and YC have discovered from reading their essays. They're not really concerned about the idea of a startup, if anything they would like there to be more startups to invest. The exponential nature of growth means averaging over large numbers seem to still provide decent returns and all they have to filter for are teams that are really serious about getting something done.
Re: For reliable excess returns, VC funds need 500 investments
#7(I'm a VC.) I'm skeptical of simulations like this one because they typically assume that every startup has the same statistical distribution of returns, and whether you pick 15 or 500 startups, each startup will have the same expected value and variance. But in practice it doesn't work like that.
A full time VC might see 2000 pitch decks per year, meet with a few hundred of those companies, and end up investing in 5. So they are picking what they perceive to be the top .25% of all pitches they see. If they invested in 20 companies, it would be the top 1%. If they invested in 200 companies, it would be the top 10%. But because these companies are ranked, the expected outcome distribution of the VC's #1 company should be a little better than the #10 company, and a lot better than the #200 company. The further down the list you go, the worse the expected value -- even though some of the lower ranked companies may turn out to be amazing.
So you can't just 40x the number of investments you make and say "expected value is the same but variance is now much lower!!1!" because you would be lowering your bar a lot by expanding the # of investments. And your variance would go down considerably, but so would your expected value.
Re: For reliable excess returns, VC funds need 500 investments
#8My takeaways from the article: (1) VC is a casino for the rich and just like gamblers in casinos they have no idea what they are doing; (2) VCs have discovered that standard deviation shrinks like the square root of the sample size, however their understanding of stats seems to be just enough to run a monte-carlo simulation. Edit: the 3rd takeaway is advice to those who're considering to join a "startup" - if VC need…
> if VC needs 500 investments to make a 15% return on average, you need 5000 years to get the sames returns as a line worker
This doesn't necessarily follow. A "line worker"'s downside risk is the opportunity cost they pay for working at a startup, which has a different distribution than the investor's downside risk (the whole investment). At the extreme end I'd argue that e.g. WeWork's investors came out of it worse than the employees.
Re: For reliable excess returns, VC funds need 500 investments
#9My takeaways from the article: (1) VC is a casino for the rich and just like gamblers in casinos they have no idea what they are doing; (2) VCs have discovered that standard deviation shrinks like the square root of the sample size, however their understanding of stats seems to be just enough to run a monte-carlo simulation. Edit: the 3rd takeaway is advice to those who're considering to join a "startup" - if VC need…
Correct, there isn't a distinction between positive expected value financial games, versus negative expected value financial games except cultural tolerances.
There is also the exclusively state-level regulation of negative expected value games versus federal regulation of positive expected value games.
There is also the liquidity.
But any moral distinctions are arbitrary and unnecessary, based on culture.
Today my colleagues on the federal open market committee and I made some important changes to our policy statement (brrr!)
Re: For reliable excess returns, VC funds need 500 investments
#10(I'm a VC.) I'm skeptical of simulations like this one because they typically assume that every startup has the same statistical distribution of returns, and whether you pick 15 or 500 startups, each startup will have the same expected value and variance. But in practice it doesn't work like that. A full time VC might see 2000 pitch decks per year, meet with a few hundred of those companies, and end up investing in 5…
(PhD Finance here) Even classical 70s-era finance is against this article:
Rich investors don't need their VC to be super diversified. They can just invest into multiple VC funds and get diversification that way.
Also, it doesn't matter how much risk is in a given VC fund, what matters is how investing part of my porfolio in that VC fund affects the risk of my portfolio!