Persistence in Venture Capital Returns (Research + Thoughts)

Interesting NBER working paper on persistence in venture capital returns over time

From the abstract:

We use investment-level data to study performance persistence in venture capital (VC). Consistent with prior studies, we find that each additional IPO among a VC firm’s first ten investments predicts as much as an 8% higher IPO rate on its subsequent investments, though this effect erodes with time. In exploring its sources, we document several additional facts: successful outcomes stem in large part from investing in the right places at the right times; VC firms do not persist in their ability to choose the right places and times to invest; but early success does lead to investing in later rounds and in larger syndicates. This pattern of results seems most consistent with the idea that initial success improves access to deal flow. That preferential access raises the quality of subsequent investments, perpetuating performance differences in initial investments.

It is interesting to read their analysis with the context of an earlier paper titled “Is a VC Partnership Greater than the Sum of its Partners?”

From the abstract:

This paper investigates whether individual venture capitalists have repeatable investment skill and to what extent their skill is impacted by the VC firm where they work. We examine a unique dataset that tracks the performance of individual venture capitalists’ investments across time and as they move between firms. We find evidence of skill and exit style differences even among venture partners investing at the same VC firm at the same time. Furthermore, our estimates suggest the partner’s human capital is two to five times more important than the VC firm’s organizational capital in explaining performance.

If you agree with the conclusion of the second paper (which is that VC returns are driven by individual partners not firms) – the first paper’s conclusions make sense – there is a short-term advantage to a firm by having a particular manager as part of the firm – but when that individual partner leaves – the skill + value leaves with them.

In general, I think this is true of traditional venture capital – but I think two sets of activities that are more natural to emerging firms may start to change this for them


Focus on Firm Brand versus Partner Brand

Many traditional venture capital firms have had a focus on individual partners and their performance versus the firm’s performance.

This could lead to better deal flow for the individual (as well as better access to cheaper capital to downstream capital for his or her investment portfolio) – but the performance of a particular portfolio company is attributed to an individual versus the broader team or firm brand.

Examples of how this manifests is inclusion of investments by partner on a firm’s website or the annual enthusiasm around the Midas List.  (There are definitely counter examples to this – one example being Benchmark Capital)

In the emerging groups, such as Y-Combinator and Indie Bio – I think this is one of the most powerful parts of their model. Companies are highly associated with the investment firm – not an individual partner – and the downstream effect is that the firm gets to keep the “equity” value of its investments versus attribution being given to an individual partner

For YC – this is how they showcase their best performing portfolio companies (which includes only batch information – no information on who worked with any specific team)

Similarly – Indie Bio (as an example of a vertical within SOSV) has done an amazing job positioning itself as the first call for the best scientists who want to become entrepreneurs and building a system that can screen thousands of companies to end up with 14 or 15 per batch

Having invested in a small fund by SOSV to invest in every company in Batch 2 and Batch 3 – we have been fortunate to have a close relationship with their team and have been able to watch watch how their brand has driven amazing top of the funnel demand (thousands of applications per batch) while the number of companies they select has remained the same (and has increased the quality of each batch over time)

For both YC + Indie Bio – they have built firm brands that will last beyond their individual team members and portfolio company outcomes will have a positive effect on sourcing of future opportunities and will enable existing + future portfolio companies to access more + cheaper capital


Network Effects

The ability to cross pollinate learnings from within a portfolio is powerful – but requires a culture of trust (and probably non-attribution of individual partner performance) to work

For True – we saw this in our consumer hardware portfolio – where our early investment in Fitbit led to a number of other consumer hardware investments.

Initially, we were one of the few seed investors in the space – but as the market matured – the ability to access other Founders or teams who had scaled or faced similar challenges was a powerful tool in being able to win investments with the best new companies.

Some of this we did in formal events – but the goal was to get out of the way and normalize cross company collaboration within the portfolio – initially at the Founder level, but over time – we’ve seen it within functional senior leadership groups (ie in marketing, product, or engineering)

These are some of the events we hosted to start the conversation in specific markets – but we’ve seen this flywheel work in other markets including CPG, Computational Biology, Open Source Software, Insurance, Cryptocurrencies, and more.


As a specific example of how this can work in the portfolio, the initial Ring Video Doorbell used the same Wifi Chip as the Fitbit Aria scale.

During our investment process with Ring, the Fitbit team shared what they had learned about the wifi chip + helped work with the Ring team to use those learnings to help them best place the chip in the device.

This knowledge sharing helped our firm win the investment and then ultimately drove better performance of the company (and the on going relationship between the companies ultimately helped as technical learnings could flow back + forth between their groups)

First Round Capital + other firms have other programs that look to drive similar coordination – and I think the firms that do this well – will be stronger and ultimately have more predictable outsized returns over time.

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