Predictably Bad Investments: Evidence from Venture Capitalists
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Re: Predictably Bad Investments: Evidence from Venture Capitalists
#2"Are early stage investors and venture capitalists better than an algorithm? This paper suggests that the answer to that question is ‘no’. Although venture capitalists outperform the broad stock market quite significantly, most of this overperformance is driven by only a subset of their investments. An algorithm can prune out the investments that are ‘predictably bad’. This increases returns by approximately 7–41%, creating an even larger magnitude of outperformance versus the stock market. The author believes the reason for the poor investment decisions is the over-weighing of the characteristics of the founders of startups. Interestingly, I wonder if there is a repeated interaction component that might be at play – if you back the founder during a failed investment, the founder might accept you as an investor in the future when they’ll have a more successful investment."
https://www.nominalnews.com/p/new-research-highlights-decemb...
Re: Predictably Bad Investments: Evidence from Venture Capitalists
#3"Are early stage investors and venture capitalists better than an algorithm? This paper suggests that the answer to that question is ‘no’. Although venture capitalists outperform the broad stock market quite significantly, most of this overperformance is driven by only a subset of their investments. An algorithm can prune out the investments that are ‘predictably bad’. This increases returns by approximately 7–41%, c…
> if you back the founder during a failed investment, the founder might accept you as an investor in the future when they’ll have a more successful investment
Apparently this is why Sequoia is backing Musk with x.ai.
Re: Predictably Bad Investments: Evidence from Venture Capitalists
#4This is a joke. Generally 1 or 2 investments (out of 30-40) make the fund. I'm in a fund where one company (SpaceX) outperformed a combination of several other superstar companies (Facebook, Palantir, Airbnb, Spotify), not to mention the other 40 companies that returned little
This is how venture work, returns are long-tailed
> despite the fact VCs outperform the market on average, the returns are driven by the top half of the predicted quality distribution. By dropping the bottom half of investments and instead investing in the market, returns would have increased by 7 to 41 percentage points
Re: Predictably Bad Investments: Evidence from Venture Capitalists
#5This is a joke. Generally 1 or 2 investments (out of 30-40) make the fund. I'm in a fund where one company (SpaceX) outperformed a combination of several other superstar companies (Facebook, Palantir, Airbnb, Spotify), not to mention the other 40 companies that returned little This is how venture work, returns are long-tailed > despite the fact VCs outperform the market on average, the returns are driven by the top h…
SpaceX has not outperformed anything for the later round investors yet. It may have a high hypothetical valuation in an illiquid market but it doesn’t mean you can sell your shares.
Re: Predictably Bad Investments: Evidence from Venture Capitalists
#6This is a joke. Generally 1 or 2 investments (out of 30-40) make the fund. I'm in a fund where one company (SpaceX) outperformed a combination of several other superstar companies (Facebook, Palantir, Airbnb, Spotify), not to mention the other 40 companies that returned little This is how venture work, returns are long-tailed > despite the fact VCs outperform the market on average, the returns are driven by the top h…
SpaceX has not outperformed anything for the later round investors yet. It may have a high hypothetical valuation in an illiquid market but it doesn’t mean you can sell your shares.
Got in before the fourth launch of Falcon 1
Re: Predictably Bad Investments: Evidence from Venture Capitalists
#7The paper is a little dubious.
The dataset was not constructed at the point in time of investment, and the missing data is signal because nobody cares to get financial info of smaller failed startups.
It's entirely possible VCs are not perfect, but this paper is certainly not the last word on the topic.