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

Jason Lemkin · published 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 · published 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 · published 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 · published 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 · published 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 · published 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 · published 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 · published 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 · published 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 · published 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 · published 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 · published 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

Paul Graham · published Mar 2009

The median VC loses money and only a fraction of VC firms have positive returns; the rest exist to satisfy fund managers' demand for venture capital as an asset class.

This was one of the most surprising things Graham learned working on Y Combinator, and it explained the behavior of VCs he encountered while running Viaweb.

source Median vc loses money and most firms exist to satisfy lp demand for venture as an asset class