Are most venture capital firms profitable? Or do they have too many failures? If yes, why do people still invest in them?

Yes, even today in 2018, the Best of Times, venture capital overall isn’t worth it. The average returns don’t beat Nasdaq, and the funds themselves are highly illiquid. Vs. Nasdaq, you can sell shares anytime.

But the top funds and the top firms beat Nasdaq, and handily. Start-up investments, to paraphrase Fred Wilson, are one of the few ways you can repeatedly make 10x–100x–1000x your investment. Investing in a start-up at $2m or $10m that ends up being worth $10b is a type of gain you just can’t really get anywhere else. And it’s rare, but also, it happens every year.

Every year, at least some new start-ups will start-up that can make you 1000x your money — if you invest early stage. Scores more can make you 100x your money. And many, many more can make you 10x. The vast majority make you 0x, but that’s not really the point. The point is that as a group, a handful of new start-ups evolve every single year that can make you 100x-1000x your money.

The question is, can a specific venture fund reliably get into these investments? It’s not remotely easy. But the very best funds have proven they can, repeatably.

If so, that’s a risk worth taking, at least with patient capital. Capital that can tolerate a decade or more of partial illiquidity.

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Published on July 10, 2018

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