Do venture capital returns compensate LPs for the risk of investing in the asset class?

Jason Lemkin · May 27, 2024

Individuals should not invest in venture funds at all and should buy index funds like VTI or the S&P 500 instead

A 3x net over sixteen years on a small illiquid check isn't worth the extra gains versus liquid index returns, and individuals don't write large enough checks for it to matter

Scope: applies to individuals writing small checks; would be different if committing half one's net worth

66:30 20VC: Why Seed is Systemically Broken | Why Pricing is Worse Than Ever and There is More Funding Than Ever | Benchmarks for Churn, Retention and Growth Rates - Good vs Great | Why Last Vintage for Private Equity Will Suck with Jason Lemkin

Harry Stebbings · Oct 14, 2024

Institutions copying Swensen's 35-40% venture allocation is a serious mistake because the conditions that justified it no longer hold

Swensen's model worked in an era of much better liquidity and much higher selection hit rates; today hit rates are far lower and illiquidity is real

Scope: self-described as getting on a high horse

33:27 20VC: Investing Lessons from FC Seeding Uber, Airtable and Coupang | Why Pro Rata is the Original Sin in VC | Why Liquidity Has Died in 2024 | Why LPs are Pissed with VCs | The Hard Truth About Seed Fund Economics with David Frankel @ Founder Collective

Mitchell Green · Mar 28, 2025

It is very hard for venture to justify its place in an institutional portfolio, and there are too many venture funds

27:20 20VC: Why Traditional VC is Broken: How VCs Learned Nothing from 2021 | Why LPs are More Important than Founders & Advice to Emerging Managers | Bull Case for Bytedance & Why TikTok's Ban Doesn't Matter with Mitchell Green, Lead Edge Capital

Harry Stebbings · Aug 4, 2025

As the interviewer recounts, the guest has previously stated that 90% of LPs shouldn't be investing in venture

Scope: stated off-air by Miles and repeated back by Harry as a prompt

13:09 20VC: Inside Carnegie Mellon's $4BN Endowment | Why 90% of LPs Shouldn't Invest in VC | The $140BN Problem with Multi-Stage Funds | The Hidden Math Behind DPI, TVPI, and Illiquidity with Miles Dieffenbach

Miles Dieffenbach · Aug 4, 2025

Only top-decile venture managers consistently deliver returns above the public market equivalent; even top-quartile managers do not

The performance data shows returns above the PME are only achieved consistently at the top decile, so a new allocator's real question is whether they can access those managers

Scope: frames the test as whether a new allocator can access top-decile managers

0:00 20VC: Inside Carnegie Mellon's $4BN Endowment | Why 90% of LPs Shouldn't Invest in VC | The $140BN Problem with Multi-Stage Funds | The Hidden Math Behind DPI, TVPI, and Illiquidity with Miles Dieffenbach

Miles Dieffenbach · Aug 4, 2025

Only top-decile venture managers consistently beat the public market equivalent; top-quartile access is not enough, so the key question for any new allocator is whether they will have top-decile access — and most new entrants will not.

The performance data shows returns above the PME only at top decile, and new entrants to a major asset class rarely get top-decile access.

Scope: applies especially to new endowments/family offices entering the asset class; top quartile is explicitly not sufficient

13:20 20VC: Inside Carnegie Mellon's $4BN Endowment | Why 90% of LPs Shouldn't Invest in VC | The $140BN Problem with Multi-Stage Funds | The Hidden Math Behind DPI, TVPI, and Illiquidity with Miles Dieffenbach

Byron Deeter · Aug 25, 2025 · hedged

An index of the venture industry across these cycles will make money but has historically underperformed the S&P and probably will again this time

Home runs more than make up for the zeros while a middle pack of one-to-three-x outcomes carries the load

Scope: portfolio construction was still not optimal

69:14 20VC: Do Margins Matter in AI? | Is Defensibility Gone For Good? | Is Vertical SaaS Dead in a World of AI | What SaaS Rules Are BS and No Longer Apply in a World of AI | The Future of Venture: Why Chanel vs Walmart is BS with Byron Deeter

Nick Chirls · Sep 6, 2024

Venture firms only need returns roughly in line with the Nasdaq to keep raising, so most venture is beta to the Nasdaq with no alpha — and a worse investment given illiquidity and higher risk

LPs keep funding firms whose performance falls within the Nasdaq range, so there is no pressure to generate genuine alpha

Scope: true for all of venture, not just large firms

32:30 20VC: Why VC is a Ponzi Scheme Today | Why Most VCs are Bankers | Why Big VCs Ruin Startups | Why Incentives in VC are Broken | Why American Dynamism is a Tool for VCs to Raise Money with Nick Chirls, Asylum Ventures

Miles Dieffenbach · Aug 4, 2025

LPs are not being paid for the risk they take in venture capital

Mature vintages from 1998 to 2016 show a median net IRR of about 8%, top-quartile IRR around 15% with about 2.5x MOIC, and top-quartile 15-year DPI of only 1.8x — versus the Nasdaq 100 as the public market equivalent benchmark for venture

Scope: based on mature vintages through 2016; measured against a QQQ/Nasdaq 100 public market equivalent

11:41 20VC: Inside Carnegie Mellon's $4BN Endowment | Why 90% of LPs Shouldn't Invest in VC | The $140BN Problem with Multi-Stage Funds | The Hidden Math Behind DPI, TVPI, and Illiquidity with Miles Dieffenbach

Chamath Palihapitiya · Jul 13, 2020

As venture and startup investing globalizes, returns will decay to single-digit IRRs even as the asset class grows enormously

Returns decay in every market when it expands — real estate went from 30% IRRs to high single digits and private equity from 30-40% to high single digits, while both categories became vastly larger

46:27 Returns decay to single digit irrs as venture globalizes and scales like real estate and pe did

Miles Dieffenbach · Aug 4, 2025

Early-stage venture is probably the riskiest private asset class, so LPs must demand return that compensates for that risk

A $100M fund backing two or three people and an idea, often against big incumbents with no near-term profitability, carries far more risk than an asset like a triple-net-lease industrial building with 3% annual rent escalators and a replacement cost

10:46 Early stage venture is the riskiest private asset class demanding compensating returns

Harry Stebbings · Aug 4, 2025

The top-decile-access argument rests on lagging historical returns and doesn't apply to first-time funds and small micro funds, which is exactly where many family offices and smaller endowments are playing today.

Prior-return data doesn't exist for first vintages, so historical manager rankings can't screen them.

13:59 Track record based screening cannot apply to first time or micro funds