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 Kelly Criterion https://en.wikipedia.org/wiki/Kelly_criterion … would say that to maximize your long-run growth, you should not invest in martingales at all -- after all, they have no long-run tendency to grow!
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So do the portfolios of VCs have a positive exponential growth rate? i.e. do they have a systematic tendency to grow, or are they just exponentials of random walks? (which only make money on average because you exclude those which go broke).
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You can't know for sure, but you can do quick-and-dirty Z-tests to see if the firm's long-run IRR is outside a 95% confidence interval away from zero. My data is very incomplete but so far it looks like some firms meet this criterion and some don't.
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But I just made up the 95% confidence interval; investors are not necessarily foolish for investing in VCs that "can't reject the null hypothesis", especially if they invest in a diverse set of VCs that together have a mean growth rate >0.
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The basic overall conclusion is that VC’s as a class make about the same return you’d expect to compensate for their level of risk. This average includes a mix of VC track records, from “no better than coin flipping” to “way above-market returns.”
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End of conversation
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