Good point. Though I think the top VCs hardly ever lose money on a fund, they just make lower profit margins. In fact Doug Leone of Sequoia once said that they never had a fund that lost money, although in 2002 they almost did . But even if they did, if their investors had consistently invested in their funds over the years, they would have been ahead of the game. So in the long term I believe that top VCs and their investors are going to do well.
Since VC investing is supposed to be higher beta, I think an index fund of U.S. small cap stocks would probably be fairly appropriate, possibly with some investments from emerging markets (e.g. Brazil) thrown in. The person who would know exactly the right benchmark would be Paul Kedrosky, I'm sure it's appeared on his blog at some point or another.
People outside the finance world seem to think beta is the same thing as standard deviation, and forget about the market correlation factor. I think the natural conclusion goes like: beta ~= risk ~= potential reward. It's hard to remember the bit where the ups/downs correlate with the market.
The most common way I've heard the term used is to mean correlation to "the market", meaning "the set of things that you can invest in".
A high beta asset goes up more than everything else when "markets" do well, and a low beta asset less so.
It is common in a multi-asset-class trading environment to make a grab for beta when the belief is that the short term trend for markets is good. Like when there is unexpected positive news flow about the global economy. "Buy some beta!"
My guess is that VC returns are dominated by IPO exits, and IPO exits need institutional and retail demand for equities, which tends to happen in up markets. To the extent that VC returns are directional with the state of capital markets broadly, it seems like calling it a high-beta strategy is reasonable.
I probably used the wrong term. What I meant is that for small cap stocks, there is a very high rate of return over a 20+ year timespan, but in any given year there is a lot of uncertainty. Venture capital strikes me as being similar in that sense.
I agree - it seems true (albeit strange) that only a handful of VCs are making returns that justify the risk. But those top VCs are consistently ahead of the game. I don't think those index funds did very well during the tech bubble burst, when Sequoia almost lost.