More on Skewness in Venture Returns

Bill Burnham has a provocative comment on my post about skewness in venture capital returns. I’m replying to Bill with a full post later today, but I for now I’ll simply point people to Bill’s thoughtful missive.

Related posts:

  1. Skewness in Venture Capital Returns
  2. Is There Too Much Venture Capital (or Just too Much Talking about It)?
  3. Howard Anderson and Having Your Venture Cake
  4. Does Price Matter in Venture Investing?
  5. Shotguns, Rifles, & the Death of Geography in Venture Capital

Comments

  1. Andrew says:

    I was tempted to comment “Yes, what Bill said,” but thought I should add a little more than that. How about a link to a research paper that seems to address some of the questions Bill raises?
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=473341

  2. Bill Burnham says:

    I guess I should wait for Paul’s full post, but I couldn’t help but notice Andrew’s comment and took a quick look at the paper he mentioned, which is very interesting. Table 9 of that paper partially addresses point #2 of my comments in that it estimates the probability of a follow-on fund for a particular firm staying in the same tercile. What’s interesting is that for firms in the top tercile, the probability of their next fund remaining in top tercile tercile is basically a coin-flip (48% or 55% depending on the perspective) and for firms in the middle tercile the probabilities are roughly in-line with a random guess (33%). I suspect that if you divided these returns into quartiles, that the percentages would be even lower, i.e. there would be significantly less than a 50% chance that a firm can repeat top quartile performance. I think that these findings go strongly against conventional wisdom in the LP community in that there are few LPs that would conceed that a top quartile fund has a less than 50% chance of repeating that performance. As an aside, Table 9 and its implications seem to be a bit inconsistent with the central finding of the paper, that there are persistant returns across funds, however I guess that just means while absolute returns within firms are somewhat persistent, relative returns are not.