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For reliable excess returns, VC funds need 500 investments

institutionalinvestor.com

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Re: For reliable excess returns, VC funds need 500 investments

#41

Post by thomasahle »

vmception wrote: post #9
ry454 wrote: post #3

My 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 c…

> there isn't a distinction between positive expected value financial games, versus negative expected value financial games except cultural tolerances

Why not? positive expected value games seem like a much better thing to post your money into.

Re: For reliable excess returns, VC funds need 500 investments

#42

Post by vijayr02 »

threeseed wrote: post #19
ry454 wrote: post #3

My 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…

> just like gamblers in casinos they have no idea what they are doing I follow all of the VCs on Twitter and it's very clear from their many, many tweets that they have a far superior intellect than the rest of us which allows them to divinely predict the future. And between them and their diverse network of other 40 year old, white males they have a rich, deep understand of the customer's wants and needs. And from t…

This is increasingly true in the Private Equity (PE) world...

A lot of recent exits have been sales to other PE funds rather than to the IPO market.

PE / VC have become an Assets under Management (AUM) game where the GPs only care about the fixed fee they get on the cash invested. With funds locked in for 10 years or more, that's a massive annuity - who needs outperformance?

And if you do need to show liquidity, let's exchange a few assets between the usual suspects...

Re: For reliable excess returns, VC funds need 500 investments

#43

Post by spekcular »

arthurcolle wrote: post #28
greesil wrote: post #4

Takes a lot of samples to converge to the mean of a fat tailed distribution.

you should read Taleb's new book "Statistical Consequences of Fat Tails"

I realize this is a bit off topic, but no, the parent poster should not. It's a mish-mash of poorly explained introductory probability material. There are numerous other textbooks on statistical aspects of heavy-tailed random variables that would be far more insightful.

Re: For reliable excess returns, VC funds need 500 investments

#44

Post by surfearth »

vijayr02 wrote: post #42
threeseed wrote: post #19

Earlier quoted context omitted.

> just like gamblers in casinos they have no idea what they are doing I follow all of the VCs on Twitter and it's very clear from their many, many tweets that they have a far superior intellect than the rest of us which allows them to divinely predict the future. And between them and their diverse network of other 40 year old, white males they have a rich, deep understand of the customer's wants and needs. And from t…

This is increasingly true in the Private Equity (PE) world... A lot of recent exits have been sales to other PE funds rather than to the IPO market. PE / VC have become an Assets under Management (AUM) game where the GPs only care about the fixed fee they get on the cash invested. With funds locked in for 10 years or more, that's a massive annuity - who needs outperformance? And if you do need to show liquidity, let'…

You seem to be insinuating that a PE exit via a sale to another fund is somehow inherently bad. Many PE investors would argue the opposite - IPOs have lockups and price volatility that increase both certainty of exit and time to exit. A sale to another PE firm or corporate entity generally deliver a large onetime cash payment.

Re: For reliable excess returns, VC funds need 500 investments

#45

Post by LudwigNagasena »

threeseed wrote: post #19
ry454 wrote: post #3

My 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…

> just like gamblers in casinos they have no idea what they are doing I follow all of the VCs on Twitter and it's very clear from their many, many tweets that they have a far superior intellect than the rest of us which allows them to divinely predict the future. And between them and their diverse network of other 40 year old, white males they have a rich, deep understand of the customer's wants and needs. And from t…

> And between them and their diverse network of other 40 year old, white males

Pretty ironic jab considering that the Bay Area VC crowd drinks the idpol kool aid so much.

Re: For reliable excess returns, VC funds need 500 investments

#46

Post by vmception »

thomasahle wrote: post #41
vmception wrote: post #9

Earlier quoted context omitted.

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 c…

> there isn't a distinction between positive expected value financial games, versus negative expected value financial games except cultural tolerances Why not? positive expected value games seem like a much better thing to post your money into.

Oh because they are just as much gambles as the other, there are several cultures that require a distinction between gambling and investing, and many cultures that don’t and won’t try to rationalize it just so they can sleep at night.

The only reason positive expected value financial games exist is because there exist certain external cases that make them profitable almost all the time, such as inflation. But if your trade isn't sticking around for that, they aren't inherently positive expected value.

I have pity for the people that feel they need to split hairs over this.... while paying for insurance.

Re: For reliable excess returns, VC funds need 500 investments

#47

Post by mrfox321 »

surfearth wrote: post #44
vijayr02 wrote: post #42

Earlier quoted context omitted.

This is increasingly true in the Private Equity (PE) world... A lot of recent exits have been sales to other PE funds rather than to the IPO market. PE / VC have become an Assets under Management (AUM) game where the GPs only care about the fixed fee they get on the cash invested. With funds locked in for 10 years or more, that's a massive annuity - who needs outperformance? And if you do need to show liquidity, let'…

You seem to be insinuating that a PE exit via a sale to another fund is somehow inherently bad. Many PE investors would argue the opposite - IPOs have lockups and price volatility that increase both certainty of exit and time to exit. A sale to another PE firm or corporate entity generally deliver a large onetime cash payment.

I think he is questioning if a company or IP is valuable if it is only changing hands between funds. As opposed to, let's say, the public.

Re: For reliable excess returns, VC funds need 500 investments

#48

Post by throwaway2245 »

thomasahle wrote: post #41
vmception wrote: post #9

Earlier quoted context omitted.

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 c…

> there isn't a distinction between positive expected value financial games, versus negative expected value financial games except cultural tolerances Why not? positive expected value games seem like a much better thing to post your money into.

A national lottery with a positive EV would still make almost all players losers.

Re: For reliable excess returns, VC funds need 500 investments

#49

Post by throwaway2245 »

lpolovets wrote: post #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…

Even if we agree that a VC is able to rank investments by high EV and low (non-zero) variance, it's still the case that a small number of investments poses a higher risk than optimal.

Re: For reliable excess returns, VC funds need 500 investments

#50

Post by yowlingcat »

andreareina wrote: post #8
ry454 wrote: post #3

My 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…

Correct. Another vehicle to display your point may be to consider the serial startup executive, who leapfrogs from growth stage startup to startup every few years, collecting 0.5%-2% of each in the process. For people who want to make returns from their stakes in startups, that seems like a better idea than going the VC route because it's easier to get better information and better deals as an insider.

You can only make so much money from startups by gatekeeping how other people's money is invested. That skill does not an operator make. VCs with operating experience I think operate with a different toolset and underwriting criterion than lifers.

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