I've been trying to understand the very basics of venture capital, as a relative finance-illiterate. Some stuff I've learned from looking at return on investment numbers:
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The S&P 500 has a mean return on investment of about 10% a year. (It depends on the size of your window for the moving average, as of course the stock market will go down in recessions.) This is the return you'd expect on average from investing in an index fund.
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So the first question I asked is the dumb-and-obvious one: "do VC's, as a class, actually do any better than an index fund?" The answer, reassuringly, is yes; there's a lot more variance in VC returns, but in the long run early-stage VCs make about a 20% yearly return.
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(source: https://www.cambridgeassociates.com/wp-content/uploads/2015/05/Public-USVC-Benchmark-2014-Q4.pdf …)
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VCs as a class have about the same internal rate of return as Berkshire Hathaway https://www.berkshirehathaway.com/2018ar/2018ar.pdf …, a standard example of a very good investment firm.
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An exceptional single *company* can have a higher rate of return, though: Amazon has been growing at an average rate of 36% a year since it IPO'd. If you had to pick between being Jeff Bezos and being a typical VC, on purely money grounds, you'd want to be Bezos.
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It's apparently possible to be a VC firm that raises large funds and underperforms; DCM Ventures is in the top 10 firms for largest funds raised and the IRRs I could find are as follows: DCM II: 0.20% DCM III: 2.1% DCM IV: 4.89% DCM V: 18.69% DCM VI: 3%
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Replying to @s_r_constantin
Did you find anything on the correlation between fund size and returns? I'd expect larger funds to have lower, but more consistent returns
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No; sadly the data I'd need for that is proprietary and costs more than I can afford.
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