Sunday, May 8, 2011

The risk and return of venture capital

I confirm the robustness of the estimates in a variety of ways. I also find that the smallest Nasdaq stocks have similar large means, volatilities, and arithmetic alphas in this time period, confirming that the remaining puzzles are not special to venture capital.Link to abstract

For all of you who think that VCs are genius's or gods who can tell the future and make great returns, what the above means is that very small NASDAQ stocks has similar risks and returns.  VC's charge their 2% and stomp around like gods.  In fact, they have similar efficacy as active mutual fund managers, which have lost respect as statistical analysis has dissected their performance.  Same will eventually happen to VCs.  Another knock on the efficacy of VCs is the small sample size or success because the majority of returns come from a few big wins, Yahoo, Ebay, Google, Ebay, Facebook, Twitter, Zygna.  If a VC gets in early, he's golden.  Misses it.  Sorry Charley.  Anyone can be right a couple of times, especially when in the loop.   Of course being in the loop and investing accordingly will draw you toward the mean, but the mean is OK much of the time.  I'm a big fan of essentially indexing in public markets.  Why not VC?  So, here is a fund idea.  Hire a bunch of hot chicks to hang out with the big VCs and invest along side.  Only charge 1%/10% rather than 2%/20% because you are paying strippers to gather research rather than Harvard MBAs.  I know this won't work.  Investing in the plum deals required "membership", and my girls and I won't have the pedigrees.  I know how to hire to gain access!   

No comments:

Post a Comment