There has been this narrative about investing in VC funds that you have to get into the top quartile (25%) or possibly the top decile (10%) in order to generate good returns. I have heard that for as long as I have been in VC and probably have written it here a few times.

Well, it turns out that is not right. Half of all venture funds outperform the stock market which is the benchmark most institutions measure VC funds against.

My friend Dan Malven wrote about this on his blog yesterday:

A working paper published by the National Bureau of Economic Research (NBER) in November 2020 contradicts that notion, showing that half of all VC fund managers outperform the public markets, and are therefore worthy of institutional investment.

This study was based on a large sample of VC fund level returns from 2009 to 2017 and does not include the last few years which have been particularly strong for the VC sector.

Manager selection remains an important part of VC investing because the lower half of VC funds do not outperform the stock market. An interesting data point from this study is the VC “fund of funds” mostly outperform the stock market so a portfolio of VC funds will generally give you enough diversification that you can meet your performance objectives.

The best way to know what managers to pick is to be in the startup business in some way. All you need to do is watch how people behave to know who is good and who is not. The Gotham Gal and I have been investing in the VC funds of managers we know well and have worked with closely on boards of startups for about fifteen years now.

These are the gross return multiples of all of the funds that are “mature” meaning the returns are pretty clear now:

I am not going to do the work of calculating performance against the stock market for these funds, but I suspect all buy maybe two of those eleven funds have outperformed the public markets.

As you can see, investing in VC funds can be very profitable. And I suspect it is getting more profitable, not less, as the capital markets and M&A markets are providing robust liquidity options for managers.

Sadly the VC market remains largely out of reach of many “main street” investors as the SEC limits these fund investments to qualified and accredited investors. That has never made sense to me and is yet another example of the “well meaning” rules resulting in the wealthy getting wealthier and everyone else missing out.