E407: Why Venture Capital is Becoming a Winner-Take All Market
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Why does Aram say venture capital is becoming a winner-take-all market?
Venture capital has never been more crowded. According to today's guest, it has also never been more concentrated. He believes the industry is becoming winner-take-all. A handful of firms will capture a disproportionate share of the industry's returns. Everyone else will be fighting over what's left. Today's guest is Aram Verdian, partner at Accolade Partners and a former investor at Andreessen Horowitz. Without further ado, here's my conversation with Aram. Aram, you believe venture capital is becoming a winner-take-all market. What's underpinning that?
Yeah, and maybe I can unpack that a little bit because it sounds like a really strong statement. A couple of things I'll say. In venture, and you can go back many, many decades, there's this concept of dispersion of returns where a handful of firms generate most of the returns. So if you look at going back 40, 50 years and you look at the value that's generated by venture backed companies, there's only a handful of firms that are participating in those companies at the early stages and own meaningful amounts on their cap tables. So double clicking on that, if you look at the dispersion of the top decile, top 5% in venture relative to the top quartile or the median, that delta is larger than in other asset classes in the private markets.
And so if you want to look more recently and our database has shown this we've looked at and our data is only us-based we've looked at over 3 000 venture capital firms in the us and our data has shown that there are less than 25 firms out of 3 000 that have consistently generated 3x net or better funds consecutively which tells you there's less than one percent of the firms can consistently generate 3x net. And why is it 3x net? Why is it not 2x, 2.5 net? Well, in venture capital, you're waiting for 10 plus years to get to liquidity. And so you need to outperform the public markets and other asset classes in the private markets that can generate liquidity more quickly, even if the return profile is slightly lower than the 3x, to essentially justify that illiquidity.
And today, if anything, the liquidity in venture is... further stretched out the average unicorn is over 12 years old in the us and so for that you need to generate two three four hundred basis points net above the public markets and also private equity that can get you 2x more quickly because of that we have found and this is how we have done our investing over the last 26 years there are only a handful of venture capital firms that can be in that less than one percent so is it a winner take all there's i think the Conclusion is, and when I unpack that statement, is there's only a handful of firms across the whole stack of venture capital that can generate that consistent 3x net plus returns.
25 firms out of the 3,000 that you studied.
Less than 25. I'm being generous. It's actually less than that. And by the way, let me give you more specificity on that. Our database shows Vintager 2005 through today, so about 20 years. where we have found out of 3,000 venture capital firms in the U.S., only 20 of them have generated consistent 3x net returns.
So 20 firms out of 3,000 have consistently generated 3x net returns. What do you make of that data?
It tracks to the concept of dispersion of returns in venture. Because every year, David, if I asked you how many companies matter, and let me define what matter is, multi-billion dollar outcomes in the public markets or M&A. like five, 10 billion plus, how many companies are there per year? There aren't going to be 30 to 50 every year that are generated in a venture back. It's probably going to be 10, 20. If that, there are years where it's far less than that. And so it actually tracks to exactly that. And so how many firms are going to be backing the seed series A, series B of those companies where they own enough, where a single deal can return multiples of their funds? So it actually, it's less the underlying fund data.
You have to double click on that and say, what's driving that?
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Chapters
5 chapters
1
Why does Aram say venture capital is becoming a winner-take-all market?
0:00–6:12
2
What evidence shows only a handful of VC firms deliver consistent 3x net returns?
6:12–17:38
3
How does fund size and portfolio construction affect a firm’s ability to sustain top performance?
17:38–22:29
4
Why is persistence easier for big firms than for pre-seed/seed managers?
22:29–46:03
5
How should early-stage investors think about adverse selection, leading rounds, and ownership math?
46:03–1:11:33
Speakers
2 identifiedMore from How I Invest with David Weisburd
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