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Fund Economics

I'm getting several questions comparing the S&P index with the possible return of our fund, how should I answer it?

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Feb 06, 2024
1) An ordinary bank fixed deposit doubles in 7.5 years or less with zero risk. 2) S&P 500 $100 invested in 2011= $444 in 2023, a return of 344%, 12.5% per year. If Adjusted for inflation, published fund returns will be even lower. I saw a similar report from an Indian fund as well touting 2.5x returns. What am I missing here?
1 answer
Accepted Answer
Feb 07, 2024
If have reached this point, you probably have lost this LP and are unlikely to be able to turn them around. That being said, here is what this LP is missing. Unlike the asset classes that this LP is citing, there is a MAJOR difference between an exceptional VC and an ok one. For example, an OK outcome is the 2.5x that this LP is citing. However, it's not uncommon for great VCs to deliver 10x+ returns. It's also not uncommon for exceptional new and emerging managers with small funds like yours to deliver even greater returns if they are able invest in the right company. For example, if you can participate in the pre-seed round of the next Uber, that investment alone will likely 10x+ your entire fund even if all the other investments go to 0. 

What you must do in situations like this is to turn the LP from trying to compare asset classes, to discussing potential outlier companies that you may be able to get them into. 

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