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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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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FWIW, I've always considered any innovation investment - VC or not - to be a modified form of gambler's ruin. You have multiple hypotheses which could be proven wrong, and they are all contingent. If any one of them goes wrong, the entire investment collapses.
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This is why VC investment returns are power law distributed - that's gambler's ruin. Given the level of uncertainty involved, it also certain implies that a lot of success in innovation investment (and especially outsized success) is luck. It's the nature of the beast.
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