Rethinking Serial Persistence of VC Returns

Bill Burnham has a thoughtful post up today on the subject of serial persistence of returns from venture investing. The idea that top-tier venture firms in any period, unlike mutual funds, stay in the same performance tier in subsequent periods is an attractive one, the sort of thing that funds would understandably love to trumpet.

But is it true? There is ample academic evidence that I’ve cited here many times (like here, here, and here) to suggest that it has been true. Or, to be specific, the very best funds stay the very best, the bad funds stay bad, and the middle can go either way, but rarely do. The phenomenon is loved by top-tier VCs and top LPs alike: You just invest in the top funds and alibi that by saying that you’re counting on serial persistence of returns.

As Bill points out, however, there is ample reason to expect that serial persistence will not, you know, persist. I won’t go into all Bill’s reasons other than to say we generally agree, but I do think Kleiner and Sequoia will always fish in well-stocked ponds. Yes, there will be far fewer pre-punched meal tickets in the venture business ten years from now than there were ten years ago, but that narrowing will just make the fight to get into the very best funds even more fierce.