
Venture Capital Is Worst-Performing Asset for Calpers - DicksenZuider
http://www.bloomberg.com/news/articles/2016-08-10/venture-capital-is-worst-performing-asset-for-calpers
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nabla9
“WE HAVE MET THE ENE MY... AND HE IS US” Lessons from Twenty Years of the
Kauffman Foundation’s Investments in Venture Capital Funds and The Triumph of
Hope over Experience

[http://www.kauffman.org/~/media/kauffman_org/research%20repo...](http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2012/05/we_have_met_the_enemy_and_he_is_us.pdf)

(The whole thing is good read)

>The Kauffman Foundation investment team analyzed our twenty-year history of
venture investing experience in nearly 100 VC funds with some of the most
notable and exclusive partnership “brands” and concluded that the Limited
Partner (LP) investment model is broken. Limited Partners—foundations,
endowments, and state pension fund—invest too much capital in underperforming
venture capital funds on frequently mis-aligned terms. Our research suggests
that investors like us succumb time and again to narrative fallacies, a well-
studied behavioral finance bias. We found in our own portfolio that:

\- Only twenty of 100 venture funds generated returns that beat a public-
market equivalent by more than 3 percent annually, and half of those began
investing prior to 1995.

\- The majority of funds — sixty-two out of 100 — failed to exceed returns
available from the public markets, after fees and carry were paid.

\- There is not consistent evidence of a J-curve in venture investing since
1997; the typical Kauffman Foundation venture fund reported peak internal
rates of return (IRRs) and investment multiples early in a fund’s life (while
still in the typical sixty-month investment period), followed by serial
fundraising in month twenty-seven.

\- 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.

\- Of eighty-eight venture funds in our sample, sixty-six failed to deliver
expected venture rates of return in the first twenty-seven months (prior to
serial fundraises). The cumulative effect of fees, carry, and the uneven
nature of venture investing ultimately left us with sixty-nine funds ( 78
percent) that did not achieve returns sufficient to reward us for patient,
expensive, long-term investing .

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technotony
It sounds like the problem isn't venture capital returns as a whole, but that
Calpers can't get into the best funds for structural reasons related to the
need to publicly disclose fund returns. Not surprising it underperforms if it
can't get into the best funds. This data point isn't therefore very valuable
for assessing Venture Capital returns as a whole which is what the headline
implies.

~~~
fweespeech
> It sounds like the problem isn't venture capital returns as a whole, but
> that Calpers can't get into the best funds for structural reasons related to
> the need to publicly disclose fund returns. Not surprising it underperforms
> if it can't get into the best funds. This data point isn't therefore very
> valuable for assessing Venture Capital returns as a whole which is what the
> headline implies.

\---

> Calpers, which manages about $303 billion, has pared back investments in VC
> funds to represent 5 percent of its private-equity portfolio. Calpers has
> been working toward reducing its VC assets to 1 percent of its total because
> it’s been rejected by many top firms it wants to invest in. In 2012 when VC
> holdings were 7 percent of the portfolio, a Calpers executive said VC firms
> often prefer to keep out investors that are required by law to publicly
> disclose details about fund performance.

If you are scared about your fund performance being public, its likely the
opposite of your conclusion. Funds with above market performance tout it
publicly and loudly precisely because it brings in more money for them to
manage.

Similarly, Calpers looked into them based on the fact they were "top firms"
however without verifiable returns that can be discussed publicly...no one
(even Calpers) can be certain these are in fact "top firms" in terms of actual
return for the institutional investor.

YCombinator and many VCs make investments that are public knowledge in
startups and these reports are circulated in the media. There is no
competitive advantage to be found in keeping investments secret long after the
fact, unless you might scare off potential customers who believe you are a
"top firm" when from a RoI standpoint you are not.

Markets need to be transparent and competitive to function fairly for
everyone.

People that oppose that always are looking to screw you.

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tptacek
This probably says less about Venture Capital as it is practiced today (or,
say, a few years ago) by sophisticated investors and large funds/endowments
that can plow money into VC simply to meet some asset allocation / correlated
return metric.

But it does have, I think, a lot to tell us about the role of startups in the
larger economy in the medium term. For instance, it adds important data to
discussions about crowdfunding.

Read the Kauffman paper posted on this thread, too: familiar conclusions in
much more detail.

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seibelj
In a portfolio as large as Calpers, doesn't putting some money in an asset
that has a 10 year return of 5.6% not a bad idea? I'm sure they need to be
diversified.

~~~
nibs
Probably yes, but not when that 5.6% is coming from something inherently low-
liquidity and high-risk.

