Predictably Bad Investments: Evidence from Venture Capitalists (opens in new tab)

This is a joke. Generally 1 or 2 investments (out of 30-40) make the fund. I'm in a fund where one company (SpaceX) outperformed a combination of several other superstar companies (Facebook, Palantir, Airbnb, Spotify), not to mention the other 40 companies that returned little

This is how venture work, returns are long-tailed

> despite the fact VCs outperform the market on average, the returns are driven by the top half of the predicted quality distribution. By dropping the bottom half of investments and instead investing in the market, returns would have increased by 7 to 41 percentage points

"Are early stage investors and venture capitalists better than an algorithm? This paper suggests that the answer to that question is ‘no’. Although venture capitalists outperform the broad stock market quite significantly, most of this overperformance is driven by only a subset of their investments. An algorithm can prune out the investments that are ‘predictably bad’. This increases returns by approximately 7–41%, creating an even larger magnitude of outperformance versus the stock market. The author believes the reason for the poor investment decisions is the over-weighing of the characteristics of the founders of startups. Interestingly, I wonder if there is a repeated interaction component that might be at play – if you back the founder during a failed investment, the founder might accept you as an investor in the future when they’ll have a more successful investment."

https://www.nominalnews.com/p/new-research-highlights-decemb...

The paper is a little dubious.

The dataset was not constructed at the point in time of investment, and the missing data is signal because nobody cares to get financial info of smaller failed startups.

It's entirely possible VCs are not perfect, but this paper is certainly not the last word on the topic.