I think this topic is pretty misunderstood. I saw this analysis from a family office on early stage VC returns over the last 25 years where the median IRR was 7% and mean was 50% - power law distribution. What this says is that if you were able to index all of VC you would capture the mean. The problem is indexing the mean is not simple. The outliers and when I mean outliers I am talking the decacorns are so rare. And because they are so rare, their view was that you would need to capture at least 20% of all the underlying early stage VC deals in order to have high certainty you capture the mean. I call this the good lottery odds problem. If the jackpot was $1 billion and your odds were 1 in 100 million BUT you only had $100k of life savings, would you buy $100k of lottery tickets? The odds are great if you have a ton of scale. The problem with VC is the volatility because of the lower percentage of huge outliers. So in this argument, maybe this why capital is flowing for funds to be bigger. The more bets you make in a fund especially if your ability to pick and more importantly win the best deals is higher may allow you to more CONSISTENTLY capture the outliers thus reducing volatility and getting the mean IRR. Ultimately I think Tiger was trying to do this strategy but did it at the absolutely peak of the market. If their funds weren't one year funds but multiple years, they would have Vintage diversity and their strategy may have worked......yep, hot take.
I've only been involved with smaller venture funds, so I lack experience with the internal machinations of mega funds. But if I was an LP in one of these funds, I would imagine preferring a 1.0-1.5% management fee, 4-7% hurdle rate, and 30%+ incentive fee, or some kind of similar structure.
Great commentary on the change of incentive alignment towards 2% GP fee optimization.
I think this topic is pretty misunderstood. I saw this analysis from a family office on early stage VC returns over the last 25 years where the median IRR was 7% and mean was 50% - power law distribution. What this says is that if you were able to index all of VC you would capture the mean. The problem is indexing the mean is not simple. The outliers and when I mean outliers I am talking the decacorns are so rare. And because they are so rare, their view was that you would need to capture at least 20% of all the underlying early stage VC deals in order to have high certainty you capture the mean. I call this the good lottery odds problem. If the jackpot was $1 billion and your odds were 1 in 100 million BUT you only had $100k of life savings, would you buy $100k of lottery tickets? The odds are great if you have a ton of scale. The problem with VC is the volatility because of the lower percentage of huge outliers. So in this argument, maybe this why capital is flowing for funds to be bigger. The more bets you make in a fund especially if your ability to pick and more importantly win the best deals is higher may allow you to more CONSISTENTLY capture the outliers thus reducing volatility and getting the mean IRR. Ultimately I think Tiger was trying to do this strategy but did it at the absolutely peak of the market. If their funds weren't one year funds but multiple years, they would have Vintage diversity and their strategy may have worked......yep, hot take.
I've only been involved with smaller venture funds, so I lack experience with the internal machinations of mega funds. But if I was an LP in one of these funds, I would imagine preferring a 1.0-1.5% management fee, 4-7% hurdle rate, and 30%+ incentive fee, or some kind of similar structure.