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.

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# More on Skewness in Venture Returns

By July 27, 2005 · ·

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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

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.