There is plenty of information about VC returns that is, frankly, quite misleading. Here is one that has done the rounds:
There is a glaring issue with this. Let us use this to compute an overarching take on the venture industry, by taking the expected value of LP investments.
Let’s say $100M is invested into this entire pie - what does it become?
50% returns less than 1x - let’s say 0.5x (imprecise but allow it) → $25M
35% returns 1-2x - let’s say 1.5x → $52.5M
10% returns 2-3x - let’s say 2.5x → $25M
5% returns - let’s say 3x? → $15M
So far, we are at $117.5M. Although 50% of funds provide no return, we are already at 1.1x (the average case - you don’t lose any money). Now, over a 10 year investment period, that’s not great, considering that average S&P performance is near ~7% annually (almost 2x over 10 years, or $196M to be exact).
But, what if those 5% of funds actually do much, much better than 3x? This graph conveniently leaves out the exact value here, which is funny, because that value alone will decide whether or not all of venture is worth it.
Amazing funds have returned a 7x, 10x, 20x.
A 7x turns our total return to $132M.
A 10x makes it $145M.
A 20x, $202.5M.
VC is defined by its power law - a small number of results asymmetrically affect the whole outcome.
Median return - what is shown in the graph - is a useless measure. Depending on the top-tier outcome, it is very possible for the median return to be terrible (more than 50% of funds have terrible outcomes), while keeping the average return spectacular (high expected value for investing in venture).
But, guess what, this also isn’t segmented by a key input: size.
Funds sizes vary from <$50M (microVC) to well over the billion-mark. How do their returns correlate to size?
The real graph that should be going around, is much more straightforward:
The same pie graph, but instead of splitting by % of multiples, split by fund size and weighted average return.
For example, funds that are $50-100M return on average $200M. Or $50M. Or whatever it is. Because fund size absolutely determines what fund strategies are available, and which work. For example, mega funds like A16z are not aiming to return 7x on their $4B funds - they are trying to provide safe, predictable returns as a wealth management option. There also just aren’t that many opportunities to park $4B. For a $25M fund though? Many, many options. And even “small” outcomes, like a $100M acquisition, are enough to move the needle significantly for those smaller funds. Imagine a $500k at a $2M valuation - i.e. 25% of the company. That single investment is enough to return the fund. If the fund is investing at those terms, that means it gets ~50 investments like that. If only 3 turn into $100M companies, the fund outperforms (even holding every other investment as a write down to 0).