> How big is diversified enough? Classical portfolio theory says that in public equities, reasonable diversification effects can be expected when one combines 20 to 30 stocks, while more detailed recent studies set this number at 40 to 70.
Lol, what. No. Diversification is about correlation, not stock count. If you buy 40 different tech companies, you are not diversified. If you buy 3 etfs, you may be extremely well diversified.
> Analysis shows that this handful of successful deals is responsible for around one-fifth of the total cash returned by the industry. To reliably access the excess returns generated by one in 250 deals, a fund size of more than 500 investments is needed. Anything less risks having a portfolio without any mega-winners.
This only matters from the perspective of the fund manager, not an investor. From the perspective of the investor, investing in 1 big fund with 500 companies is equivalent to investing in 2 small funds with 250 companies.
> This counterintuitive result is further validated by a recent Kauffman Fellows study, which says that at the seed stage, “indexing beats 90 to 95 percent of investors picking deals.” In VC as a whole, it seems from Figure 2 that indexing beats 50 to 75 percent of investors picking deals, since indexing gives second-quartile result
When will people stop saying this trash? Indexing beats lots of things. Indexing beats cash, it beats bonds, it beats CDS. But all those things still exist. And they exist because they are uncorrelated asset classes, just like venture capital.
Diversifying your portfolio across uncorrelated asset classes elevates your long term CAGR assuming each returns stream has positive expectancy. This is why people invest in things that have lower expected returns than stocks - those things have less risk, and more importantly, uncorrelated risk. All of this is finance 101, and yet, publications calling themselves 'institutional investor' still don't seem to understand portfolio theory. I guess then they can't write clickbait articles about the great mystery of venture capital.
There is no mystery in VC. Investors diversify across VC funds. If you are thinking about investing in a VC firm, what you care about is uniqueness of the return stream. You want to be able to pick and choose manages who will themselves make diversified bets, so that your overall portfolio is diversified both across companies, and across perspectives. The system as constructed makes complete sense.