I don’t understand venture capital as an investment. It’s a pretty lame deal as far as asset allocation goes. The cash is tied up for a decade, and the returns of all but the best funds barely beat the market. Jason Lemkin of Storm Ventures says:
The traditional thinking is VC has to do at least 50% better than Nasdaq to account for illiquidity. That means a 30%+ IRR (i.e., annualize returns) bar these days.
I guess that’s a fair comparison. Venture capital roughly follows the same cycles as Nasdaq. After all, that’s where the investments ultimately get liquidity.
But if venture capital performance is correlated with Nasdaq, and the premium is the price of liquidity, then why not just put money into Nasdaq? The purpose of asset class allocation is not to diversify liquidity, it’s to diversify correlation. If Nasdaq tanks, hopefully you own some other crap that’s still doing okay.
Venture capital isn’t an asset class, it’s a system to transfer wealth from state pension funds into the pockets of general partners. Some of the wealth moves into the pockets of kids working on new technology. This part is important, because that technology can have a moonshot chance of improving the world. Someone’s gotta fund moonshots, and it’s not gonna be banks.
Venture capital, then, is a charitable service. Why not advertise honestly? Nonprofits are allowed a 3% management fee so VC firms can still afford disgusting salaries and daily crudité delivery. Maybe that decreases the likelihood that endowments and pension funds allocate assets to Silicon Valley, but LPs allocate less than 0.5% of their funds to this subset of private equity anyway. Venture capital is already a tax writeoff.