E124: Is Venture Capital Entirely Based on Luck? University of Chicago and Oxford Study

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Dec 27, 2024

Join David Clark, CIO of Vencap, as he shares insights from his data-driven venture capital firm. He challenges the myth that small funds always outperform large ones, exposing survivorship bias in performance data. Discover how Vencap identifies top managers—over 90% of their capital goes to just a handful. Clark dives into the power law dynamics of early-stage and growth funds, revealing that only a small percentage drive returns. He also discusses how political and economic shifts impact investment strategies in the venture landscape.

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INSIGHT

Persistence of Returns in Venture Capital

Venture capital exhibits persistence of returns, especially in top-quartile funds.
This persistence is even stronger in venture capital compared to private equity.

INSIGHT

Data Limitations and Survivorship Bias

Public data on smaller venture fund performance is limited and potentially biased.
Many underperforming funds don't report, skewing datasets like PitchBook and Cambridge.

ANECDOTE

Data Sharing Disparity

Only 5.1% of funds under $99M shared data, compared to 29.7% of $500M-$1B funds.
Larger funds are six times more likely to share data, creating potential survivorship bias.

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In this episode of the How I Invest Podcast, I interview David Clark, CIO of Vencap, to discuss the venture capital landscape. We discuss assumptions about small vs. large venture funds, unpack survivorship bias in performance data, and explore the power law dynamics in early-stage and growth funds. David Clark shares Vencap's strategy for identifying top-performing managers, insights on fund size limits, and the implications of political and economic shifts on venture capital. A must-listen for investors seeking a data-driven perspective on navigating the venture ecosystem.

Highlights:

Myth of Small Fund Outperformance: David Clark challenges the belief that smaller venture funds consistently outperform larger ones, noting limitations in available data and survivorship bias.

Survivorship Bias in VC Data: Many underperforming funds don't report their results, skewing datasets like PitchBook and Cambridge. Clark highlights Carta as a potential unbiased source for small fund performance data.

Power Law Dynamics in Venture Capital: Vencap's data shows that even growth funds exhibit power law outcomes, with 1.6% of their investments being fund returners—higher than early-stage funds (1%).

Focus on Top-Performing Managers: Over 90% of Vencap's capital goes to 12-13 managers who have a track record of consistently backing fund-returning companies.

Venture vs. Private Equity: Venture funds show stronger persistence of returns compared to private equity, with top-quartile funds often repeating their success.

Fund Size Considerations: Vencap evaluates whether fund sizes align with the ability to back companies that generate massive returns. Excessively large funds can dilute performance potential.

State of Venture Post-2020 Election: While short-term political changes may influence sentiment, Clark emphasizes focusing on long-term relationships with top managers and founders.

Valuation Practices in Venture: Skepticism over inflated venture fund valuations is warranted, but Clark sees signs that portfolios may now be undervalued.

Guest Bio: David Clark is the CIO of Vencap, a firm specializing in venture fund investments since the 1980s. With a data-driven approach, Vencap partners with top-performing venture managers to navigate the power law dynamics of venture capital. David’s insights are rooted in decades of data, challenging conventional wisdom and focusing on long-term outperformance in venture markets.

Our Podcast now receives more than 200,000 downloads a month. Are you interested in sponsoring an episode? Please email David Weisburd at dweisburd@gmail.com.

We’d like to thank @ReedSmith for sponsoring this episode!

#VentureCapital #VC #Startups #OpenLP #AssetManagement

SPONSORS: Reed Smith is a dynamic international law firm dedicated to helping clients move their businesses forward. With an inclusive culture and innovative mindset, Reed Smith delivers smarter, more creative legal services that drive better outcomes for their clients. Their deep industry knowledge, long-standing relationships and collaborative structure make them the go-to partner for complex disputes, transactions, and regulatory matters. Learn more at www.reedsmith.com.

Stay Connected: Twitter David Weisburd: @dweisburd David Clark: @DaveClark85

LinkedIn David Weisburd: https://www.linkedin.com/in/dweisburd/ David Clark: https://www.linkedin.com/in/david-clark-6678b6b/

Links VenCap: https://www.vencap.com/

Questions or topics you want us to discuss on How I Invest? Email us at dweisburd@gmail.com.

(0:00) Episode preview (3:38) Survivorship bias and its effects on venture capital (11:48) VenCap's investment strategy and return persistence (16:04) Key factors influencing founder choices of investors (16:25) Sponsor: Reed Smith (19:04) Relationship between fund size and performance (20:06) Venture market insights after the 2024 election (23:36) The interplay between startups and investor actions (25:28) What excites LPs about the venture asset class (26:46) Venture fund valuations and market concerns (27:16) The predictive power of TVPI and DPI in venture funds (29:03) Following David Clark online and data-driven investing (31:04) Closing remarks