I would argue that investing into startups, including top VC funds is a fool's errand.
Excluding of course hobbyist investors.
Why?
1. VC deals are very hard to come by and anything promising (potential unicorns) get picked off fast by Tier 1 investors. This basically limits the average Joe to syndication investing.
Even then... It's a fool's errand. Why?
2. The best VCs return around 20% per year and if you invest direct you still need to pay you 2/20 fee which knocks you down to 15-16%.
If you invest direct a lot of deals can net you 22 - 40x your return but let's look at these statistics:
Of YCombinator companies (usually top shelf startups) founded from 2005 to 2015, a whopping 32% have failed and 41% are 'operational', meaning yet to exit and only a mere 26% have exited since 2020.
Failure rates aside, let's say it takes on average 10 years for a startup that does succeed to net you a 22x return or around 22% per year.
3. Most VCs and startup investors show you unrealized IRR, which is that their company investment valuations are going up and up, but where you lose is when you look at their exit potential and see unless you can find someone else to buy your shares, the growth rate tends to slow down at some point into maturity and your IRR shrinks to around 20% with a STDEV of maybe 5% given this illiquidity.
4. With public markets these days, there's plenty of companies with the same appreciation potential, especially with SPACs and BioTech companies pending FDA approval that are liquid, more transparent, and more easily accessible.
5. There is always the potential you will get lucky and find the next Coinbase or Uber, but the weighted probability of that is very small and is really more akin to speculative gambling than strategic investing.
So, prove me wrong HN.
