Power Law VC Performance with David Clark (VenCap)
Dec 13, 2023
auto_awesome
In this podcast, Nick Chirls, Beezer Clarkson, and David Clark discuss the challenges and strategies for unlocking performance in venture capital investments. They explore the role of emerging managers, the significance of dollar sizes and returns, and the importance of focus and long-term commitment. They also analyze venture capital performance data, discuss return expectations, and share valuable lessons from past market cycles.
Prioritizing managers with a proven ability to access top-performing companies is crucial for generating strong returns in venture capital.
Early-stage funds with companies that generate the entire fund's returns are more likely to outperform.
The speaker's firm primarily invests in established managers with a track record of consistently investing in top-performing companies.
Deep dives
Importance of Focusing on Top Performing Managers
Focusing on managers who consistently outperform is crucial for generating strong returns in venture capital. Through an analysis of their own portfolio data, the speaker's firm found that a small number of managers consistently produced high returns, while the majority delivered disappointing performance. By prioritizing managers with a proven ability to access top-performing companies, the speaker's firm has built a concentrated portfolio of around a dozen managers. They emphasize the need to recognize and win highly competitive deals, as well as the importance of pattern recognition and experienced judgment in successful venture investing.
The Importance of Fund-Returning Companies
The speaker emphasizes that early-stage funds with companies that generate the entire fund's returns are more likely to outperform. The data shows that more than 50% of VC investments do not return capital, and a relatively small number of companies are responsible for the majority of industry returns. Therefore, the speaker argues that the key to successful venture investing is identifying and consistently accessing these top-performing companies. The data also reveals the significance of understanding exit sizes and their relationship to fund size and ownership. Ultimately, the goal is to back managers who have a proven ability to achieve fund-returning outcomes.
Different Perspectives on Emerging Managers
The speaker's firm, which primarily invests in established managers, acknowledges the potential for outperformance among emerging managers. However, they express skepticism about the predictability of success among emerging managers and the ability to consistently identify the best performers. They highlight the challenge of managing loss ratios in venture and caution against overly relying on the belief that emerging managers and small funds always outperform. The firm's strategy has evolved to focus on established managers with a track record of consistently investing in top-performing companies.
Strategies for Success in Venture Capital
The speaker highlights several key attributes that contribute to success in venture capital. These include the ability to recognize and win competitive deals, the value of established brand names in hiring and attracting talent, and the importance of experience and pattern recognition in navigating the ups and downs of the market. They emphasize the need for venture investors to remain focused on their core strengths and not be distracted by other investment strategies or asset classes. Additionally, they stress the importance of realistic valuations and the need for transparency and open communication with LPs.
Challenges and Opportunities in the Venture Market
Looking ahead, both speakers anticipate further turbulence in the venture market. They expect to see a significant number of companies fail to raise additional capital, leading to potential consolidation or closures. They caution that companies may struggle to regain their growth trajectory given the challenging market conditions and reduced access to capital. However, they also point out that there are still strong businesses that have weathered the storm and are well-positioned for potential public market exits. They expect fundraising to become more challenging, particularly for new and unproven managers, while established managers with proven track records may face less difficulty.
In the last Origins episode of the year, Nick Chirls (Notation Capital) and Beezer Clarkson (Sapphire Partners) host David Clark, Investment Director at VenCap International plc.
With nearly four decades of experience in investing, David has backed some of the most established VC funds across the US, Europe, China and India and shares historical figures on where to find performance in venture. David recently uncovered 30 years of data from 400+ funds with 15,000+ underlying portfolio companies and found that 50% of VC investments don’t actually return capital. So how does an LP unlock performance and find the enduring managers?
Three individuals with three unique strategies - Nick (emerging manager), David (LP investing in established), and Beezer (LP investing in emerging & established) – find out how their models differ, where perspectives intersect and what David’s return data shows.
