> If your conclusion is correct, how are
the VCs staying in business?
Reasons:
(1) The money comes from the limited
partners (LPs), and they are heavily
investors with big bucks. We're talking
billions, from university endowments,
state pension funds, sovereign wealth
funds (say, a fund run by a rich Mideast
oil country), some family wealth funds,
maybe some insurance companies, maybe some
hedge funds.
Of course, venture might hit a grand slam
with great returns, and no doubt each
venture firm that raises money from LPs
claims that they are a top tier firm
with great advantages and some great
investment themes that with their "deep
domain knowledge" and great business
experience and insight will let them get
much better than average returns.
These limited partners invest billions in
all good looking asset classes. Venture
capital is regarded by the LPs as an
asset class but is relatively small.
So, for the limited partners, venture
capital is small potatoes and slips in
under the wire even if on average the
returns have been poor.
(2) The LPs have FMO -- fear of missing
out. Due to the rapid progress of
technology, the Internet, etc., the
venture firms can keep telling the LPs
that "This time it's different." with some
possibility of being correct. So, some
portfolio manager at an LP doesn't want to
have to answer why they didn't invest in
KPCB or Sequoia and, thus, missed out on
Google.
(3) The LPs are not good at technology
or able to evaluate "ideas" or look for
"better" ideas. Instead, the LPs are
closer to traditional commercial bank
lending and private equity that put a lot
of weight on accounting statements and
don't expect to evaluate ideas or
technology. So, the LPs are not pushing
their venture firms to evaluate "ideas".
http://www.avc.com/a_vc/2013/02/venture-capital-returns.html...
http://www.kauffman.org/newsroom/2012/07/institutional-limit...
Net, on average, the returns are poor.
> If your conclusion is correct, how are the VCs staying in business?
Reasons:
(1) The money comes from the limited partners (LPs), and they are heavily investors with big bucks. We're talking billions, from university endowments, state pension funds, sovereign wealth funds (say, a fund run by a rich Mideast oil country), some family wealth funds, maybe some insurance companies, maybe some hedge funds.
Of course, venture might hit a grand slam with great returns, and no doubt each venture firm that raises money from LPs claims that they are a top tier firm with great advantages and some great investment themes that with their "deep domain knowledge" and great business experience and insight will let them get much better than average returns.
These limited partners invest billions in all good looking asset classes. Venture capital is regarded by the LPs as an asset class but is relatively small. So, for the limited partners, venture capital is small potatoes and slips in under the wire even if on average the returns have been poor.
(2) The LPs have FMO -- fear of missing out. Due to the rapid progress of technology, the Internet, etc., the venture firms can keep telling the LPs that "This time it's different." with some possibility of being correct. So, some portfolio manager at an LP doesn't want to have to answer why they didn't invest in KPCB or Sequoia and, thus, missed out on Google.
(3) The LPs are not good at technology or able to evaluate "ideas" or look for "better" ideas. Instead, the LPs are closer to traditional commercial bank lending and private equity that put a lot of weight on accounting statements and don't expect to evaluate ideas or technology. So, the LPs are not pushing their venture firms to evaluate "ideas".