Do Venture Capitalists Beat Random Allocation?
Why venture capitalists' picks look no better than random luck
Venture capital investors pick companies that perform almost identically to what chance alone would predict, when accounting for timing, location, and industry. Even the best-performing VC portfolios don't beat the outcomes expected from random selection, suggesting that skill in choosing individual companies is nearly impossible to detect in an industry dominated by a handful of huge winners.
This finding challenges the premise that venture capitalists earn their 2-and-20 fees through superior judgment. If VC performance is indistinguishable from random allocation, it raises hard questions about whether investors should pay premium fees for what amounts to passive exposure to startups. The same pattern holds for stock analysts picking companies, suggesting skill is difficult to prove in any extreme winner-take-most market.