There is a nice factoid buried in this piece on venture capital in the current BusinessWeek. The article is nominally about the supposed excess of venture money out there, but the more interesting aspect is some discussion mid-way down about the asymmetry of returns from venture investing:
The number of venture firms has more than tripled over the past 20 years, to roughly 1,200. Yet only 4% of those firms accounted for 66% of the market value from IPOs between 1997 and 2001. In other words, the top 50 firms are delivering the vast majority of the investment returns. “The disparity between the top and bottom is becoming pretty incredible,” says Erik R. Hirsch, chief investment officer at Hamilton Lane, a Philadelphia firm that manages funds of private-equity funds.
…Studies like this explain why institutions are pushing hard to get into funds raised by the VC firms with the best track records. But the size of those funds is shrinking, even as the amount of money available to invest in them grows. Last year, top-drawer Kleiner Perkins Caufield & Byers raised $400 million, 38% less than its 2000 fund. In 2003, Sequoia Capital raised $395 million, half the size of its 2000 fund. “There is substantially more interest to get into the top-tier venture funds than there is room,” says Clint Harris, managing partner at Grove Street Advisors, a Wellesley (Mass.) consultant to institutional investors.
Combine this with the serial persistence of returns in venture capital — the best-performing firms in one period tend to be the best performing in subsequent quarters — and you have the recipe for a never-ending LP traffic jam at KP/Mayfield/Sequoia et al.