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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A martingale can have a positive expected rate of return but a zero "drift" term (modeled as a geometric Brownian motion, e^(mu*t + sigma W_t), martingales have mu=0.)
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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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Replying to @s_r_constantin
Conventional wisdom in the industry is that a handful of firms have “alpha” (a measure of better than chance returns) but that nearly all are effectively investing at random.
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yep, that's what my calculations are showing and it's consistent with this paper's https://www.nber.org/papers/w13056.pdf … estimate that the average alpha of VC is zero.
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