Big Winners and Bold Concentration: Unveiling the Secret Portfolio Returns of Leading Venture Funds
An exclusive inside look into how funds who have returned more than 10X to LPs make and lose money.
In 2015, Chris Dixon wrote a post in partnership with Horsley Bridge about the Babe Ruth Effect in Venture Capital. Last year I shined some light on that data with the following tweet .?
The overwhelming response led me to reach out to some of our own Limited Partners (LPs) to pull some updated data on the Power Law in VC and shine some light on the differences between Good Funds they’ve looked at (3.53X MOIC average) vs. Great (17.95X MOIC average, all over 10X) funds.?This dataset incorporated returns data from more than 5,700 companies and more than 150 mature VC funds.
The reality is that venture math is not spoken about nearly enough. More specifically, VCs don’t discuss the required unicorn or home run hit rate that drives top decile returns OR the concentration of capital and returns that is prevalent amongst the top performing managers.?
While a new crop of managers have entered the world of seed investing and many push the narrative of it being a game of luck, some of the data below might argue otherwise.?
I want to thank the team at Stepstone , one of the top institutional LPs in the industry who have been incredible partners to us, for sharing some of their anonymized data with me to help drive the industry forward.?
Great Funds hit home runs over 2X more than Good Funds
10X+ funds get 10X+ returns on 14.1% of their companies.
When we’ve modeled out how to return 5X net to LPs, meaning how much you send home to LPs after fees and carry, we’ve found time and time again that your unicorn hit rate needs to be close to 10-15%.
And Great Fund “Winners” are nearly 2.5X larger outcomes for them than good funds
Great Funds see an average MOIC of 68.42X on their 10X+ investments vs. Good Funds at 27.44X. This shows that not only are they winning, but they’re winning big.
While our analysis shows that a 10-15% unicorn hit rate is how you get to 5X net funds, the obvious outlier is when you are able to invest in something that becomes a decacorn or something worth multiple billions of dollars which could end up being equivalent of hitting 2, 3 or 10 unicorns!
Nearly all the returns are driven by the 10X+ investments for Great Funds, proving the VC power law…
91% of Great Fund Returns come from 14% of the Companies
Similar to Chris Dixon’s dataset from Horsley Bridge, we find that Great Funds not only have more home runs, they have home runs of greater magnitude. What this chart shows is Power Law of venture capital in full effect.?
Great funds get 91% of their returns from 14% of their investments, while Good funds only get 40.3% of their returns from 10X+ investments, 25.1% from 5-10X and 15% from 3-5X.?
Across the board early stage VCs are losing money almost half the time
Great Funds lose money just a little bit more than Good Funds
Another interesting stat is loss ratio. What we found in the data is that Great Funds tend to lose money slightly more than good funds, but that both lose money >46% of the time showing us that even the best tend to lose money on nearly half their bets.
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Concentrating Capital - Great Funds know how to double down
But one of the most interesting pieces of information we found through our analysis is that Great Funds know how to concentrate capital exceptionally well.?
Great Funds invested 38.7% of their capital in 23.1% of their investments, which generated over 5X+. 23.9% of that capital went into their 10X+ investments.?
Good Funds on the other hand invested 18.6% of their capital in 14.4% of their investments that generated 5X+.?
Assuming you hold all other variables constant, if the Good Funds had concentrated capital the exact same way that the Great Funds did, their returns would have gone from 3.53X MOIC to >8X MOIC.
This >2X difference in capital concentration can drive some serious improvement in returns (or downside) AND can reflect a manager's ability to both identify their winners early and earn the right to continue to invest in them along the way.?
Ultimately, this dataset has left us thinking deeply about the following:
I'm curious to hear what questions it brings up and what takeaways others have.
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VC | Serial Founder | Engineer | Father | Artist | Philosopher
5 个月Jason Shuman Fascinating data... for Seed+ funds. But does the thesis hold at pre-seed? If a pre-seed fund invests in sub-$1M rounds, with valuations that are 1/2 to 1/4 of the subsequent Seed round investors, then the bar for a 68.42x outcome is far lower. The math isn't linear, of course, but if the entry valuation on an eventual unicorn is, say 1/3 the valuation of the Seed round, then the exit value will often not require unicorn status at all. Certainly, pre-seed should expect a higher attrition rate as well. But as you said, loosing more money is characteristic of a greater fund. :-) Not really, of course. But it's not a simple assumption that loosing 40% more bets is less effective than reserving 40% of capital for doubling down. Also, concentration of capital in Pre-seed is not the same choice as in Seed+. At Pre-seed, the companies next round mostly does NOT produce a clear win signal. It usually doesn't even produce a hazy win signal. There is a lot of sausage making in Pre-seed and, I would propose, taking more swings is a more effective approach than doubling down when the is so, so, so much more uncertainty at a company's graduation from Pre-seed to Seed than at Seed to Series A. I'll tell you in 8 - 10 years.
Managing Partner @ Echo River Capital | MBA, Water Expert, Impact Investor
6 个月In your next article, consider expanding on your first question -- what evidence exists in identifying winners early? Would be great to mine the data for how much of a fund's return came from the initial 1-2 rounds vs. follow-on / pro rata.
Great insights here! Have you explored leveraging predictive analytics to refine your pitch based on historical funding success patterns? We've found tailoring communication strategies to investor profiles using AI significantly increases funding success rates.
Cofounder and CTO at Artificial Genius Inc.
6 个月Jason Shuman Super interesting: “if the Good Funds had concentrated capital the exact same way that the Great Funds did, their returns would have gone from 3.53X MOIC to >8X MOIC”. This is great because it goes beyond the tautological “winners pick winners” narrative to show that the losers could have been winners if they had just had the courage to concentrate their capital, taking the VC power law to heart. Given the power law, 10X is actually aiming too low. The goal for VCs should be “infinityX” - startups that are creating opportunities that no one else would ever figure out no matter how much time or money they had.
Advisor | Board Member | Founder, CEO | ex-McKinsey, American Express, CommonBond
7 个月This is great. Thanks for sharing, Jason.