I received this August 2010 Venture Capital Update from Silicon Valley Bank and thought the fund-of-funds perspective could be of interest to entrepreneurs. It’s a bit of inside baseball, but it never hurts to understand how your investor’s, investors think. Aaron Gershenberg, Sven Weber, and Jason Liou did a nice job pulling this together and sharing real-world data. Their approach was to take a few of the worst vintage years, in their estimation, for the venture capital industry (2000-2002) and share their fund-of-fund results. Those results suggest that a well-diversified portfolio of venture capital funds, across stage, geography and industry can deliver returns — even in bad periods. You can read the full report below:
Those findings match what I read a few years back from Tom Weidig and Pierre-Yves Mathonet, in their 2004 research “The Risk Profiles of Private Equity: Private equity is a risky asset, but private equity investments are not necessarily so.” In both studies you can see the power of fund-of-funds diversification.
At a time when much of the industry is consolidating, the smartest asset managers who maintain diversification across stage, geography and industry should beat the market — as they always have.
For my entrepreneur readers, is this kind of institutional asset management, LP perspective of interest? What questions does it prompt? Any surprises?