Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

10-Year Study Erases VC 'Smart Money' Claims

Posted by Tom Foremski - July 31, 2013

2013 07 31 16 00 12

Marc Andreessen, Bill Maris, and John Doerr, are some of the smartest investors in tech, says Wired.

The National Venture Capital Association (NVCA) and Cambridge Associates recently released a study showing that VC funds returned an average of 7.4% annually over a ten year period. For early stage funding it was just 6.4%. This compares to 8.5% for the S&P 500.

Foremski's Take: The VCs of Sand Hill Road have an unshakeable belief in their investment skills, despite the study's Big Data showing they can't outperform a grandmother investing in an S&P Index fund.

 It's easy to see how "smart money" VCs end up with dumb money returns, when they herd into the same types of me-too startups and ruin the market for each other; or force their portfolio companies to pivot their business plans based on the trend du jour in their Twitter streams.

Add to that, imposing toxic term sheets onto a startup's founders -- and it's no wonder they are increasingly despised in startup communities on both coasts.

Random picks

The VCs are extraordinarily bad at picking winners. It might be better to assign investments to a wide variety of startups on a lottery basis.

I can guarantee there would be far fewer me-too startups funded; and the next big thing is always the ugly duckling no one wanted so you might just get lucky and get that black swan event -- an extraordinary return on investment. It certainly won't happen by following the groupthink of the gulag. 

A funding lottery for pre qualified startups could work. Random acts of funding will hit gold some of the time and probably about the same number of times as "smart" funding.

A long line...

There's always been plenty of people that would love to prick VC egos but lately, their numbers seem to be rising. Others see it too.

R. Scott Raynovich at The Rayno Report writes that, "a quiet attack is building on the VC industry."

"Entrepreneurs and tech-company executives I have been speaking to lately have turned up their griping about VC investing, pointing out that it's dysfunctional and overrated."

Mr. Raynovich points out that a small number of VC firms have done well:

"Accel Partners, Sequoia Capital, Andreessen Horowitz, and Greylock Partners, which was recently profiled in this interesting Bloomberg BusinessWeek article... Greylock was invested in Facebook (FB), LinkedIn (LNKD), Pandora Media (P), Workday (WDAY), and Palo Alto Networks (PANW). That seems like more than luck."

However, the lack of data on individual VC funds makes it hard to judge performance; how much luck or brains, separates the cream from the whey.

Every VC company is a media company...

Keeping up the VC myth of "smart money" is tough when the Big Data shows it's clearly not. But there are tried and true methods to keep the hot air pumping up the hype using traditional means: PR and media.

Andreessen Horowitz, with more than $2.7bn under management in three funds, is leading the way. The firm recruited Margit Wennmachers, the co-founder of PR firm OutCast Communications as a partner; and more recently, it hired Michael Copeland, a senior editor at Wired magazine.

Some its partners have made private investments in PandoDaily, the tech news site, and in local media stars such as Michael Arrington and his CrunchFund.

It's paid off well. The firm's founders have been regularly featured in the New York Times and other leading media outlets such as CNN. It's making other VC firms jealous and I hear that other VC firms are scrambling to do the same and boost their time in the spotlight -- rather than their startups.

Because it is all about the dealflow. Yes, you might turn down the next Google or Facebook --every VC firm has it's stories -- but at least you had the dealflow to turn down. Being constantly in the media is key to getting to see the best of the startups and that means more chances at beating the S&P500.

Hiring good journalists could be a good strategy for VC firms to differentiate themselves from the herd but I doubt it will work. The journalists will be simple employees at the beck and call of masters that always know better.

Inside the mirrored bubble their reflection looks so very good -- which is why we need an independent media -- to point out any distorted fantasies. It's good for all.

And there's no point in hiring journalists to produce puff pieces about the "Princes of Sand Hill Road" when there's plenty of PR people expert in kissing frogs.

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