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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The generalization of this is a martingale. https://en.wikipedia.org/wiki/Martingale_(probability_theory) … Your expected value at the next time step is the same as your present value, but your variance grows over time as you keep reinvesting your winnings. In the long run, you get rich...or go broke.
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Replying to @s_r_constantin
If you're in the "get rich or go broke" case, you're doing some combination of investing in things that don't have positive expected return, or putting too much in individual things that do. See https://en.wikipedia.org/wiki/Kelly_criterion … and "Shannon's Demon".
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ooh! I spent the last couple of weeks deriving stuff that's equivalent to this.
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Replying to @s_r_constantin
There's a lot of neat stuff to derive! And lots of related work I'm not super familiar with about operating under slightly different sets of assumptions.
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Replying to @evanbd @s_r_constantin
A major Kelly Criterion assumption that VC operations violate, for example, is that the VC bets are slow to pay off and made simultaneously rather than sequentially.
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