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11/15/2005

Serial Persistence Follow-up

Just a quick follow-up to my recent post on the serial persistence of venture returns.  A reader kindly brought to my attention another study on serial persistence which is basically consistent with the University of Chicago Study I mentioned in my earlier post.  This study, a brief of which you can download here, was done by and LP advisory firm called Alignment Capital Group.  Alignment’s study, while less ambitious and less rigorous than the U of C study, is largely focused on the question of how likely a GP with a top quartile fund is to repeat that top quartile performance with their next fund.  According to alignment’s study, there is a 44% chance that a top quartile fund will repeat its top quartile performance.  This study’s chances of persistence are a bit higher than the U of C study, most likely because this study only covered funds with vintage years between 1980-1995 compared to the U of C study which included funds from vintages 1980-1997 plus a few others.

Even if you take the 44% at face value though, it remains a true statement to say that a GP with a top quartile fund has a better chance of not repeating that performance than they do of repeating it, in other words, the chances of a top quartile fund repeating that performance are even worse than a coin flip.

I submit once again that conventional wisdom holds that the chances of repeat performance are much better than a coin flip yet both of these studies clearly demonstrate that the chances are in fact significantly less.  These probabilities call into the question the almost blind faith that many people in the VC industry have in the ability of “top quartile” funds to repeat that performance.

All that said, in the absence of any other information about a fund, the fact that a prior fund managed b the same GP experienced top quartile performance is still obviously a very valuable piece of information that would be silly to ignore. It’s just not the only piece of information that one should consider.

One other interesting tidbit that the Alignment study noted was that “one off” funds, or GPs that only managed a single fund, handily outperformed GPs with multiple funds.  According to the study, one-off funds generated a mean IRR of 16.3% compared to a mean IRR of 9.3% for the multiple funds.  This is a highly counter intuitive result and one which I believe contradicts some of the U of C study’s conclusions which doesn’t really make a lot of sense given that both studies basically used the same data set (although U of C excluded funds with less than $5M AUM).  I’ll let the academics sort that one out.

November 15, 2005 in Venture Capital | Permalink

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The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.