The Elephant in the VC Living Room

A sizable part of my talk at the CVCA conference last week was about the elephant in the venture capital living room. There is, I argued, something big and important and dangerous (to some) that almost always goes unsaid in discussions of the future of venture capital. And so I outed the elephant.
The elephant in the venture living room is serial persistence of VC returns that locks in a gap between first-quartile venture fund performance and everyone else. There is not a performance continuum between first- and second- (and third- and fourth-) quartile venture funds. Instead, there is an ass-kicking gap, with first-quartile funds massively outperforming other venture funds. While that might not be concerning in, say, hedge and mutual funds where there is mean reversion going on, it is concerning in the venture business where there is a well-documented serial persistence in returns. In other words, the best fund last period tends to be the best fund next period, unlike in mutual funds where you can often be successful next year by shorting the fund that did best this year.
Understandably, venture fund managers don’t like to talk about this. Why? Because it is one of the biggest reasons why the venture asset market is as screwy as it is, with institutions and endowments all clamoring for access to same small subset of venture funds. And it is also why a lot the noise from new funds is just that, noise, with there being very little likelihood that they will ever rise to persistent first-quartile performance, despite the aggression, connections, and so on of their founders.