#141 VC is the Best (Asset Class) if You Choose Wisely (Sunday Special)
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Picture of the Day: VC Outperformance via Pitchbook Q2 2023 Report
Top Reads of Recent History, VC CFO Style
Welcome to a Sunday Special folks! We wanted to start you off (again) with some of our top reads of recent history, VC CFO style:
#119 The Ultimate PE/VC Fund Checklist for Year-End Finance & Compliance
A Crowdsourced List of Books and Resources for New Venture Capitalists
VC is the Top Performing Asset Class - Why?
Packy McCormick recently did a deep dive on VC as the best asset class, where he wrote the following: “I can hear the other asset classes yelling at me. Certainly, some have a case:
Public equities are the largest
US Treasuries are the safest
Real estate is the only one you can live in
Private equity is an asset class.
“But there is no more beautiful asset class than venture capital. Venture capital is a free lunch machine. I’ll admit that venture capital isn’t perfect. It’s risky, illiquid, and highly variable. The best venture funds perform amazingly well; the worst ones are horrendous.”
Key Insight: if you are able to access the best venture funds, you can take advantage of significant outperformance.
NACUBO (The National Association of College and University Business Officers) does an annual survey on endowments’ asset allocations. When Marc Andreessen wrote The Truth About Venture Capitalists in 2007, NACUBO found that endowments allocated 3.5% of their assets to venture capital. In 2023, that number grew to 11.9%.
“LPs build portfolios that are diversified across asset classes, and then further diversified within asset classes. Within venture, they will invest in a number of funds, each with its own strategy: some early stage, some late stage; some generalist, some vertical. They continue to invest across vintages, meaning that every year, they’ll invest in new funds or re-invest in funds they’ve already invested in. Those funds, in turn, diversify across a number of investments that fit their criteria over a number of years.”
“From the LPs’ perspective, venture capital is a small but growing high-risk / high-reward piece of a much larger portfolio. If any individual investment that one (or multiple) of their venture managers make fails, no matter how spectacularly, it’s unlikely to have a big impact on the overall portfolio. What’s more important to LPs is that venture as an ecosystem continues to take the kinds of risks that have a shot at driving higher returns.”
Why the Outperformance? Disruptive Technology
To understand “why the outperformance in VC?,” the simplest answer is “disruptive technology.” But what does that really mean and how do you find it?
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