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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Replying to @s_r_constantin
"outside investors in venture capital received a financial return substantially above that of publicly traded companies, but that the excess is mostly a reward for bearing risk. The pure excess return … is positive but may reflect only random variation." https://admin.nber.org/papers/w13056
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Replying to @robinhanson
thanks! Yes, "VCs earn a reward for bearing risk" is my new null hypothesis; I just wanted to first rule out "LPs could do strictly better by just investing in the stock market instead of VCs", which indeed seems to be false.
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Replying to @s_r_constantin @robinhanson
Ex fees or before fees? Several large investors have quit the class as a result.
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if fees on VC firms are the 2% I've heard is typical, then yes, even after fees, a 20% yearly rate of return is beating the S&P 500.
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