In VC there are 5-10 funds, universally known, who are the winners, and who continue to win. They get the best dealflow, meddle the least, and generally are on top.

The crazy thing is that KPCB used to be in that set and then essentially voluntarily abdicated to do cleantech crap.

A16Z came from nowhere to join that set pretty much as they launched.

The others (greylock, sequoia, benchmark, accel, etc) are pretty static.

Note the distinction between some funds being consistent winners, and the whole set of winners being consistent over time. The 5-10 funds who are consistent performers: 1) aren't the whole of the "2%" who manage to make above-market returns over some time frame; 2) can't absorb all the money investors want to put into the venture capital as an asset class. That keeps the other VC firms who aren't Sequoia, etc, in business, even if the generated returns are less than stellar. That does not mean, however, that the other VCs are "losers." They still get their 2 and 20, and as long as everyone is consistently mediocre and the top VC funds can't absorb all the capital the big institutional investors have sloshing around, they'll keep being able to raise capital.

Interesting (and fairly recent) analysis of VCs from the point of view of a limited partner with investments in a range of VC firms: http://www.kauffman.org/uploadedFiles/vc-enemy-is-us-report.....

The mediocre return of VCs also says something about Silicon Valley. The idea of venture-capital funded startups as some exceptional economic engine is probably a myth. There is a lot of economic activity in Silicon Valley, no doubt, but you have to distinguish between expenditure of capital and return on capital. $20 million spent on a startup that never ends up making much revenue is not a net gain to the economy even if it shows up as economic activity. It's just expenditure of capital. So the success of specific VCs aside, the way to measure the economic contribution of VC-funded startups is by looking at the return on investment of the sector as a whole. And since that return isn't great, relative to blue-chip companies, that tells us one of two things about the sector:

Either: 1) VCs aren't great at the job of allocating capital to the right places; or 2) VCs are doing the best job they can, and its just inherently difficult to separate the winners from the losers when it comes to startups.

My gut feeling is that the answer is (2), which implies that the nature of the industry is such that it's so hard to separate the winners from the losers that the gain from the exceptional success of the winners is largely offset by the cost of funding the losers, which makes the economic returns from the industry as a whole unexceptional compared to the returns from traditional blue chip companies.

Presumably part of the low return of VC is due to declining marginal returns due to too much money.

If SF VC funding were somehow constrained to $1b/yr, you'd get crazy percentage returns, since either only the top deals would get funded, or they'd be funded at super-favorable valuations (allowing more deals on the same money).

Well that's true in any sector. Returns go up when capital is scarce. But SF with $1b/year in VC funding would be economically insignificant, even if the returns were great.

I guess my real point is that if my choice as an LP were a16z or some other asset class, I'd maybe even slightly overweight vc as an asset class. If I were an LP who could get into YC (maybe they would take a non profit like Watsi if they raise an endowment?), obviously overweight. But if you couldn't get into a top fund, and didn't personally know the founders of a 30-50mm fund which you thought would do exceptionally well (500 Startups?), I'd underweight or just avoid the asset class.

I don't disagree with you. If I were CALPERS and needed to throw around money $5 billion at a time for it to be worthwhile, I might avoid VC entirely. My point is more about what it says about the industry as a whole. Total Silicon Valley VC investment is in the neighborhood of $11-12 billion/year. If the rate of return on that relatively small investment is, on the whole, less than the S&P 500, then that really calls into question the whole narrative about how much economic value is really being generated from VC-funded startups. Blue-chip companies might not be able to yield Facebook-like returns, but they can apparently yield VC fund-like returns, and do so while absorbing far more capital.

I'd like to see the IPO market re-open, and companies IPO around when they'd be doing large Series B today, or certainly anything after a B.

Seed and maybe A are not capital intensive, and are probably constrained by great ideas, founding teams, and early entrepreneurial employees. But I don't think VC is the right way to finance lower risk later stage stuff; the public markets could do a good job, and it would be a lot easier for risk-seeking investors (individuals or institutions) to get in and out of investments vs. being LPs in funds, and with lower overhead.

I don't think any analysis of post-SarBox VC returns can be useful without examining the effects of the closing of the IPO exit. Sure, a very few, very exceptional companies can take this route, but it has otherwise been shut after a good 4 decade or so run.

In addition to lowering returns, it unfairly prevents smart but non-rich individual investors from investing in awesome opportunities like Tesla or SpaceX in 2008.

Hmmm? The Dodd-Frank Act as of July 21, 2010 excluded an accredited investor's primary residence in counting their wealth (although for many I'm sure that was closing the barn door after the house's value plummeted), but I don't remember anything like that in SarBox (the accredited investor restriction goes back to 1933, thank you FDR).

I meant that SarBox defers IPOs until stupidly late, so "normal" investors, reliant on the protections of the public market, don't get to invest early enough to make real money.

I'd adver that "stupidly late" really is now "never", with rare exceptions that prove the rule like Facebook---which was mispriced but otherwise doesn't deserve its bad reputation (their IPO, not the company), and that's going to further dampen tech IPOs going forward for some time. Why was it mispriced??

Turn it around, to cash out, is your objective an IPO or acquisition by another company?

Further, the sharp decrease in VC returns means less in the pockets of founders and early employees, and therefore less smart money in the game. Heck, you mentioned Elon Musk's Tesla and SpaceX, his money to get them going comes from PayPal, which was bought by eBay in 2002 (by then it was already getting very bad---granted, that was when the dot.com and post/911 crash was playing out---but SarBox is generally viewed as the last nail in the coffin).

Yes. I suspect the next 5-10 years will see one of:

1) Big non-US market growing up (probably in Asia, but possibly in cypherspace), with more rational regulations

2) Massive slowdown in tech progress (which one might argue is underway, but not as obvious; if it accelerates, it will be obvious)

3) Some way for PE to take over from public markets. Content to sit on revenue-generating companies throwing off cash. This already seems to be happening; I'm not sure what the tax consequences are, but I suspect they're smart/powerful enough to either financial engineer or politically engineer a solution.

All of them suck for different seasons. #2 is probably the worst for me personally.

> to do cleantech crap.

Considering that climate change already kills 150,000 people per year [1], and that this rate will continue to (dramatically) increase, I think it's pretty rude for you to belittle the few good people who choose to fund cleantech (putting their fellow man above short-term economic "rationality").

[1] http://www.who.int/heli/risks/climate/climatechange/en/

The low hanging fruit in the space is energy. Big companies do their own incremental efficiency improvements in their own processes for other kinds of "cleantech" -- using waste products as feedstock, etc. Capital intensive, fairly proprietary, close to monopsony, etc. Horrible as investments.

Cleantech/greentech was originally defined as "non-energy", because energy had a long history of being investable. Energy efficiency and generation is a great sector for investment (I am so excited about Bloom Energy and Lightsail and FLiBe). I'm not at all excited about most of the ex-energy investments, and it appears most of those have failed to the extent that people consider energy part of cleantech now.

They were crap as investments, and most of the non-energy investments had bad science too, as well as being badly managed.

I'm totally pro-environment and pro-efficiency.

In the specific case of KPCB, they did a pretty horrible job with a lot of their portfolio. Missing Tesla and taking Fiskar was a great example. They did get Bloom. But I don't think they were approaching the sector with the kind of scientific and business rigor they used in the past for their other investments, and they were punished for it.

Thanks for the elaboration of your point of view. I agree with you now.