On: How Do Venture Capitalists Make Decisions?

[Retric]

That's reasonable at a fund level, but when 50% of the firms have negative returns why do people use them?

[lappa → Retric]

If you have 5 firms with ROIs of -10%, -5%, -3%, 1%, 14% and 31%, then 50% of the firms have negative growth rates and the median firm loses money.

However you can observe that if you invested $100 ($600 total) into each firm, you would end up with $636.

Median return isn't a very useful measure of the health of a sector. It is a predictor for risk, but not a very good one.

[Retric → lappa]

Except the worst returns are closer to -100%, the median is closer to -30% and only a small fraction are positive.

Also, your example was 7 firms with the median being 1% and a positive return.

[lappa → Retric]

The explanation completely went over your head. The numbers weren't from measurements of actual firm performance, they were demonstrative examples to explain why measuring the median isn't very useful in this case.

And no, my example was 6 firms with the median having -1% growth rate, for the record.

[pradeep_m → Retric]

Well, more than 50% of the companies have negative returns in the public market. So why do people invest in the public markets? For LPs, investing in VC firms is just to way to diversify and invest in private markets.

[Retric → pradeep_m]

Far from it the median company on the stock-market has positive returns just about every way you slice it. That's not beating the market, but the median VC firm does not just fail to keep up with the stock market, they also flat out lose money.

[bduerst → pradeep_m]

Are you sure? Net market growth is positive since 2009, so that would mean that the growth would have to be limited to an increasingly smaller number of companies.