Q: If the average venture fund loses money in aggregate, then why do so many money losing VCs still exist?

Because if you are committed to the asset class as an LP (a Limited Partner, the ones that invest in VC firms and give them their capital) … you have to take some risks to get outsized returns.

  • Yes, most VC funds don’t even return 1x.
  • And yes, even in many of the best firms, they’ve had one just terrible fund.

But …

  • The best funds can do 8-10x.  This is better than almost anything.

And …

  • The best new funds can do extremely well, and
  • You can’t always get into Sequoia and Benchmark.  They are full and generally not looking for new LPs, and when they do, they are looking for very specific types of LPs.  And maybe even some day, those firms will fade, too.

So if you are chasing that 8-10x fund … you have to take some risk as an LP.  As long as your overall VC portfolio is pretty good, and you think in terms of many funds and years … you can still hit > 20% IRR.

Basically, if you can find one amazing partner in a decent VC fund with a track record … that’s a good risk.   Because one great partner with 2-3 amazing bets can make the fund.  Almost no matter what the other guys do.

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