Very insightful post for anyone interested in investing in VC. According to various reports the VC investment activities are currently 40 - 50% below the year 2022. This seems a good indication that 2024 will be another vintage year with the power law. On a personal note: My Co-Founder and I developed the model / strategy to raise a VC fund in 2021, starting fundraising in 2022. In 2023 I thought what a crazy idea, why not just continue as a successful, independent angel investor, as the 12 years before. Now in 2024 , after our recent first closing of two VC funds, I'm sure we have the potential to benefit the power law with both funds. The time to invest in VC and especially in emerging managers is now. SNGLR Group Dr. Daniel Diemers Patrick Sutter Dr. Eszter Tanczos Olver Nilayini Vamatheva Ulrich Knopp Prasad Ramakrishnan Jay Gujral Trudi Haemmerli Karim Atari Diana Elberse Jean-Evrard Dominicé VC Lab Rami Maalouf Maria Abou-Sakr Markus Pratschke Géraldine Andrieux Gustin Regis Hamelin Pablo Garrido
A quote from a recent StepStone Group report on VC vintages around the concept of a “Vintage Power Law” is very interesting and highlights a point I often talk about. I’ve added the report in the comments. "Put differently, of the 23 vintage years assessed, 80% of returns come from just five to seven separate vintage years over the short, medium, and long term. Furthermore, 95% of returns come from six to ten of the 23 vintages measured over each time frame." Of course, investors won’t know which vintage years are power law until 7-10 years+ later. I often get the question of whether Venture Capital is a good asset class to invest in or not. The truth is that it depends. Unlike other asset classes, the magnitude of return dispersion in VC in massive. Benjamin Sun from Primary Venture Partners recently shared that the median seed fund returns of the last two decades were found (using a data set from a longstanding VC FoF) to be ~7% while mean returns were 50% (!). In other words, VC can be either a terrible asset class (as it is for many) or an incredible one. Putting aside strategic interests, this is speaking purely in financial terms. While a 50% return should never be expected (and presumably the FoF had great access and selection), it does mean that VC can be interesting only if done programmatically, which typically requires 1) Great manager selection and access 2) Consistency across cycles. The second point means that LPs typically need be committed long term across cycles and vintages --- as the Stepstone report highlighted (and be fairly consistent on deployments annually --- This does not mean the same amount each year, but variations should probably not be more than a single standard deviation or so). Unfortunately, looking at the data, it’s clear that many LPs go in heavy when times are the hottest (i.e. 2019-2021) and then retract completely during tougher times. This is primarily (not solely) a natural function of ingrained investor psychology. The problem of course is that peak times bring suboptimal outcomes due to behavioral changes (and the inclusion of tourists). It’s hard to know exactly where we are, but it’s clear that the majority of the market in no way resembles peak ZIRP.