I'll be honest -- my first impression after reading this piece was to research Peter Sims and figure out his connection to a16z, since my gut reaction was that blatant puff pieces usually have some sort of connection hidden below the surface. (I was unable to find anything.)
Sims brings up the following point about VC returns:
> The predominant old way of thinking about venture capital is that you: a) build up a great brand and reputation with a large portfolio of investments, b) hire partners who have individually strong brands of their own, and c) collect hefty management fees on each fund. The industry standard is a 2–2.5% yearly “management” fee, a figure that gets pretty large on a billion dollar fund. And, in my experience, not surprisingly, the senior people get a disproportionate slice of that management fee. At the same time, the venture capital industry has been a glaringly poor-performing asset management group, consistently underperforming the S&P 500. (For more detail on the struggles within the VC industry, a recent article on the Harvard Business Review Blog by Diane Mulcahy, a senior fellow at the Kauffman Foundation, entitled “Venture Capitalists Get Paid Well to Lose Money” is well worth reading).
But never swings back around to it (unless I missed it amongst the flowery prose). Which leads me to ask: are there data points that compares a16z (or other VC firms!) against the S&P 500, besides the aggregate?
I would love these figures too but VC is notoriously secretive about their returns. There was a court case where Reuters sued Sequoia to get them to disclose their returns based on the fact that a big public-sector pension fund was one of their investors. Reuters lost.
I have data that compares other VC firms to the S&P 500. Give me a few minutes and I'll find it. Foreshadowing: it's pretty bad, you'd do much better putting your money in an index of the S&P 500.
That's a great paper but most people are interested in the performance of the top 10 firms, not the average of the top 100. If I invest only in Sequoia/KPCB/AZ/Accel how well am I doing?
"Only four of thirty venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index"
That's helpful but the argument will always be that you just need to pick one of those four or that Kauffman are bad pickers of funds and therefore exclude many of the best from their allocation.
Outside of the VC industry, one technique used by some investment management companies is to launch enough funds that some will outperform the market by chance. Then they quietly close down all those that perform equal to, or worse than the market average and trumpet the success of the one or two that lucked out.
Perhaps which four of the thirty you should pick is only obvious with hindsight :)
or that Kauffman are bad pickers of funds
I assume when they compare VC funds to a "common stock index" they mean an index fund [1], a type of fund that aims to provide market-average performance with lower fees than an actively managed fund. For example, an index fund tracking the S&P 500 does it by holding all the shares that comprise the S&P 500.
> ... one technique used by some investment management companies is to launch enough funds that some will outperform the market by chance. Then they quietly close down all those that perform equal to, or worse than the market average and trumpet the success of the one or two that lucked out.
Yes, that's how independent investment advisors puff up their reputations also. In fact, it's the basis of a sneaky and convincing promotion scheme called "Miracle Man":
I agree with you, it just would be nice to have some data to further support the argument. It is much more convincing if Sequoia funds have inconsistent or mediocre performance than if they all had outsized returns. I am also genuinely curious as to the exact returns the premiere funds have.
Also what I meant regarding bad fund picking is that the universe of VCs funds that were in the Kauffman portfolio may not have included all the great performing funds.
Depends what's the Beta of PE/VC vs the S&P 500 / FTSE 100.
And blindly tracking major indexs means you are highly invested in a smallish number of stocks in the same area in this example investing in the big indexes means you will have take all the losses with the bank crashes - instead of a share/fund that got out or banks when it looked to toppy.
The data is misleading because it's much easier to identify the good venture funds and they perform much better than pretty much any other investment class (ie, Sequoia, Andreesen, Accel, Benchmark, Founders, etc.). Also, venture, unlike pretty much every other investment category actually can influence its portfolio and in a variety of ways.
The very nature of the S&P 500 would exclude it from such a comparison. VC funds are targeting startups not established entities. To make the S&P 500 list you have already achieved a significant balance sheet through years of tweaking /improving.
The return comparison is unequal.
A better barometer would be cash on cash returns but with vc funds that may be difficult to track.
Sims brings up the following point about VC returns:
> The predominant old way of thinking about venture capital is that you: a) build up a great brand and reputation with a large portfolio of investments, b) hire partners who have individually strong brands of their own, and c) collect hefty management fees on each fund. The industry standard is a 2–2.5% yearly “management” fee, a figure that gets pretty large on a billion dollar fund. And, in my experience, not surprisingly, the senior people get a disproportionate slice of that management fee. At the same time, the venture capital industry has been a glaringly poor-performing asset management group, consistently underperforming the S&P 500. (For more detail on the struggles within the VC industry, a recent article on the Harvard Business Review Blog by Diane Mulcahy, a senior fellow at the Kauffman Foundation, entitled “Venture Capitalists Get Paid Well to Lose Money” is well worth reading).
But never swings back around to it (unless I missed it amongst the flowery prose). Which leads me to ask: are there data points that compares a16z (or other VC firms!) against the S&P 500, besides the aggregate?