Serial Persistence, the Kleiner Effect, & Lead Swaps in Venture Capital

There are some savvy comments in a TheDeal piece about “the anointed” venture investing firms — Sequoia, Kleiner, etc. — and whether such firms will continue to dominate the industry. Consider this musing on firms and returns from an endowment fund manager:

This fund manager believes that beyond a handful of firms led by Kleiner Perkins and Sequoia, a firm’s reputation is not at the fund level but at the individual level. “Kleiner fishes in a very well-stocked pond. If you take one partner at the firm other than John Doerr and put him in a no-name firm, he probably won’t do as well. But take someone at a no-name firm and put him in Kleiner, and he’ll probably do better,” he says.

More importantly, there is the issue of whether serial persistence of returns — the best VC funds staying best — will continue. Will there, instead, be a lead swap as the prior generation of monied VCs move on and the next generation, many of whom are not at the marquee venture firms, take their place?

Even as the [venture] industry has grown and matured, the elite performers have outperformed the rest of the industry over and over again. Recently, Palo Alto, Calif.-based Focus Ventures found that the same small group of firms has consistently created a significant share of the industry’s profits over the last two decades.

The report suggests that the same small group of firms is likely to dominate the next cycle of wealth generation as well.

But will that prove correct? With the venture capital industry in a state of flux, some insiders argue that there is less certainty that previous performance is an adequate predictor of the future. Indeed, there are signs a major shakeout is unfolding, as more prominent firms break up or restructure and new firms spin out.

“There was a fair amount of stability in the 15 years leading up to the last bubble, but the post-bubble period this time has been, and will be, a great deal less stable,” says Clint Harris, managing partner at Wellesley, Mass.-based Grove Street Advisors…

Related posts:

  1. A Return to Venture Skewness (& Serial Persistence)
  2. The Institutionalization of Venture Capital
  3. Performance Persistence at Venture Funds
  4. The New Kids on the Venture Block
  5. Newbies Flood Venture Capital (Again)

Comments

  1. Michael Robinson says:

    “Kleiner fishes in a very well-stocked pond. If you take one partner at the firm other than John Doerr and put him in a no-name firm, he probably won’t do as well. But take someone at a no-name firm and put him in Kleiner, and he’ll probably do better,”
    This is very interesting, in that it suggests a market inefficiency. Are startups giving away too much equity at too low a valuation to Kleiner (Sequoia, etc.), are subsequent investors paying too high a price for the Kleiner-invested companies, or some combination of both?
    Or is the real value-add of venture capital–like carbonated beverages and athletic footwear–all in the brand management?

  2. Paul K. says:

    Michael — Good points all. You can’t infer causality from the above passage — in other words, do the best funds choose the best deals, or do the best funds make the deals they choose better? — so your questions are tough to answer.
    That said, my intuitition is that investors are relying on the “wisdom of entrepreneurial crowds”: they believe that Kleiner invests in a well-stocked startup pond, so it is rational to pay more attention to what it invests in as it “must” be the best (by some measure) of its type.
    Are such investors correct? More often than not, I would guess, but it still suggests there is a market inefficiency here, one to which I have alluded many times here.

  3. SiliconBeat says:

    BitTorrent, its VC backing and RSS

    Updated Here’s the story (free registration) that ran in the Merc yesterday about the hot San Francisco file distributing company BitTorrent, and the backing by DCM’s David Chao — who as we’ve mentioned before, is on a bit of a roll. Note BitTorrent’s…

  4. SiliconBeat says:

    BitTorrent, its VC backing and RSS

    Updated Here’s the story (free registration) that ran in the Merc yesterday about the hot San Francisco file distributing company BitTorrent, and the backing by DCM’s David Chao — who as we’ve mentioned before, is on a bit of a roll. Note BitTorrent’s…