[garry]

> In reality, if most of these founders put their money in standard index funds, they would have better returns adjusted for risk, but without all of the publicity that they crave.

This demonstrates a lack of understanding of venture returns. Actually Khosla, Andreessen, Benchmark and the rest of the top tier account for the vast majority of the outsize returns. The "average" VC you haven't heard of, and those are the ones who can't even get introduced to the startups that account for the majority of the return. The power law distribution for startup returns is widely acknowledged, and the top VC phenomenon is that power law at work.

"Adjusted for risk." Actually this particular part of what you say is particularly untrue. When people talk about risk, they also talk about reward. Typical public companies may only yield a few percentage points increase, or 2X at extreme best over a year, but startups can yield 100X to 1000X return. So even after adjusting for risk, VC at its best (given a: good deal flow and b: good ability to help / pick companies) absolutely can outperform the S&P500 / index funds. The asset class as a whole is terrible (understandably professional LPs have difficulty picking the right general partners to back) but the best VCs do just fine.

Professional VC's aren't throwing darts at a board. The best ones see great founders and great new businesses far in advance of the rest of Wall Street or mainstream business press.

[adventured]

Your 100x and 1000x example would represent the best of the best of course.

Then you use that to contrast how a public company may only yield 2X at an extreme over a year.

First, VC investors are rarely looking at a one year horizon on a new investment, so I have no idea why you chose a year as a reference point. Why would you compare an elite outcome of 1000X in VC to a typical public company?

Second, just like the best VC investments, some of the best public companies have returned 100X and 1000X. Dell, Microsoft, Oracle, Cisco, Walmart, Berkshire Hathaway, AOL, and numerous others.

Berkshire is closing in on a 1,000X return. Walmart has produced a 1000X return.

Cisco pulled off a nearly 100X return in the first seven years as a public company (it took Facebook eight years to IPO, and Google six years).

Apple recently did it as well, with a 100X return since 2003. Las Vegas Sands managed an 85X return over five years recently.

The only valid hit against public companies like these, is the time frame it took.

[garry]

You're right about time frame. We live in very different times now though — the vast majority of fast growing companies opt to stay private for far longer, thanks to Sarbanes-Oxley. Those juggernaut public co's you mention went IPO with a valuation in the hundreds of millions, which accounts for the 100X to 1000X. Now all of that is happening in these late stage rounds. Major macro shift that wasn't true before.

[foobarqux]

I guess the entire professional investment community is incompetent then for investing so little of their money in VC.

[garry]

Most professional limited partners typically do a small allocation (only a few percent) to VC overall.

[Brushfire]

There are a limited number of great, breakout startups, and they can only really utilize so much capital. Reallocating your pension fund doesn't magically create more amazing startups.

[foobarqux]

Scarcity should drive up the price and push net returns towards those of the broad market.

[ajju]

The thing you are missing is that it's really really hard to find the breakout startups. Even the top tier VCs don't know for certain whether a specific investment will be the breakout in their portfolio. They are betting that 1 out of n will be 1000x.

[dylanjermiah]

VC is a relatively small sector, it was ~50bn last year.