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Don't the big VC firms like Sequoia raise a lot of their funds from institutional investors?



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 [1]. 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.

[1] http://techcrunch.com/2011/09/12/doug-leone/


If you define losing money as generating a lower rate of return than you'd get by investing in an index fund of the stock market, then IIRC ~3/4 of VCs generate negative returns.


this is right thinking.

every asset class has a benchmark asset, and you measure the return against it.

the issue is that i don't know what asset class funds would place VC investments in. they could (but i doubt) benchmark against treasuries or whatever.

iirc a sufficiently good vc return is 3x over the life of the fund, which translates to an IRR of maybe 20%.


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.


I really doubt that's the right benchmark.

What do you mean by "high beta"? LPs are looking for uncorrelated returns. If you want high beta you could just make leveraged investments in an index.


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.


Could be. I do get the sense a lot of people here learned everything they know from blog posts, unfortunately.

For the rest: beta is defined as correlation to the market. Sigma is standard deviation of returns and also called risk.


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.


(also called risk, or volatility. oops.)


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.




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