Interesting VC analysis

Peter Rip at Early Stage VC has an interesting series of blog posts that he is producing on Venture Capital 2.0. This post caught my attention for some data that was in it regarding ways for limited partners to successfully pick VC funds which will earn the outsized returns.

I copied the paragraph below:

Last year Alignment Capital published a really interesting analysis of fund managers that speaks to these two criteria.  After analyzing 645 separate venture funds, they found:

  1. Longevity weakly correlates with IRR, showing continuous improvement between funds I and III, leveling off thereafter.
  2. Second quartile funds were nearly as likely to have a top-quartile follow-on fund as the current top-quartile funds.

Point #2 above was very interesting and unexpected. Essentially it means that the next set of funds that will earn outsized returns can come from a pool of half of the funds in existence. As a limited partner, where fund selection is this asset class is critical to achieving proper risk adjusted return, how does one pick which funds to allocate capital for this asset class?

— brian