General VC Questions

Risk quantification of investment in a VC fund

Asked by:
Jan 13, 2024
Most of the online data I see gives statistics around how many funds have returned less than 1x of the capital and how many have returned more than 2x, 3x, etc. 

However, to truly understand the risk for LPs to invest in a VC fund, it would also be great to know the statistics spanning from 0x to 1x. Let's say 80% of the fund that returned less than 1x DPI has returned above 0.7x, for example. Then, we can say that the downside of investing in VC is primarily that you can lose up to 30% of the capital invested, not all of the capital invested as happens in a direct startup investment.

As we know, the potential upside of the direct deal for the investors is much higher than investing in a VC fund; by quantifying the downside, we can compare the risk-return profile in a better way.

Is there a way we can compile this data, or is there any source available for such data? 

1 answer
Accepted Answer
Jan 13, 2024
This is a slippery slope and you will struggle to make this point, irrespective of the data. LPs should understand that, albeit low, there is a risk of total loss when investing a VC fund. However, because the upside is exponential and because the VC fund takes a portfolio approach, the probability of the LP investing a massive success is much higher. 

If you are in a conversation with an LP and you're discussing 'risk mitigation' you have lost. VC is a risk asset class. It's an asset class that's optimized for maximum upside rather then for downside protection. This is especially true for early stage funds like yours. So, if the conversation is trending towards risk mitigation, you need to take charge and tell the LP that this is investment is optimized for maximum upside via the portfolio approach. No historical data is going to convince a risk averse LP invest in a VC fund.
I agree not to have this discussion with LPs. An LP didn't actually ask us, but I was curious myself and wanted to write some posts/articles around this topic. So I was wondering if any work done in this direction.
Jan 13, 2024 6:46pm
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