the one quibble i have with Kauffman’s suggestions is the focus on terms. while they are a problem, they aren’t the core problem. good managers earn their fees. the problem is that there aren’t many good managers in the VC business.

In general, no group compares for arrogant, self-assured, willful ignorance like the decision makers in Venture Capital. Focus on numbers, inattention to detail, lack of interest and understanding of what is really being invested in is the rule, not the exception. The ‘bright young men’ are mostly not very damn bright. They are manipulative, slick and (as the report alludes to) understanding of cronyism’s road to their own paydays.

The VC industry operates as a lemming horde. The algorithm is that if something is successful or looks good (i.e. a ‘sector’ gets identified) that everybody and their rabbit will invest in it. This guarantees poor returns for venture capital as a whole. It makes no sense to back 12 different companies in an area where at most 2 or 3 can survive, to say nothing of prosper. Large institutional investors can and do screw themselves this way when the left hand doesn’t know or care what the right hand is doing.

And yet – the big returns are generally made in places that aren’t identified. Something new or that is done differently. Apple and Microsoft did that. Every VC gives lip service to finding the next one. But in my experience, not a one, ever, has been willing to consider investing outside the well-trampled mudpits in which their cronies stumble around.

From what I’ve seen, the difference between how venture capital is allocated and a blind baboon playing whack-a-mole is this. In the case of venture capital, if the blind baboon hits a mole (and kills it) then all the other blind baboons come running to whack at the same hole, hitting each other, the winning baboon, breaking their mallets and turning the freshly killed mole into a thin stain spread wetly on the ground.

There is not a lack of viable business ideas. Not at all. But there is a lack of ability to recognize such, or to even give a damn – really – if the idea is good. Sorry – but that’s the report from the trenches back to the dim bulb half-wits upstairs.

What I got out of reading this report was clarification of the social algorithm of the problem in venture capital. It’s cronyism, a de facto cabal that seeks to rip off the top-teir firms. Pretty simple to see why it works that way.

“At the sound of the tone, insert one 2-euro coin, tuck your head between your knees, and kiss your Hayek goodbye.”

“Witch!”

I also suspect that people tend to anchor on the eye-popping returns, and convince themselves that they can select the funds that’ll outperform. Kaufmann is showing that that’s not really feasible at this point in the VC asset class. I know that some folks think they can pick good active mutual funds, and I know that Felix doesn’t think that’s possible; I disagree with him here in some respects, but this paper really shows that investors really have to be aware of how their cognitive limitations limit their capacity to maximize their own returns.

Re: How should Saroff’s Rule apply to puppet shows?

Set an example: Seek venture capital to launch a vaguely described start-up whose mission is to be the world leader among companies that mediate all their interactions through robots, automata, puppets, Magic 8-Balls and vintage telephone answering machines from the 1980s.

Instead of brochures, web pages, charts or text in any format, make presentations solely by traveling puppet shows restricted to medieval technologies and standards of hygiene. Puppeteers will operate on the assumption that audiences hold medieval concepts of the world.

Golden Opportunity Potential: Kick off the campaign in Tampa during the upcoming Republican National Convention.

Suggesting success fees have anything to with the interests of the investors is nonsense – unless there is a similar negative failure fee for underperformance.

http://www.verisi.com/resources/buyout-v s-venture-capital.htm

Investment Multiple: Outside of a few exceptional *vintage* years in the 1990′s Venture Capital hasn’t produced decent investment multiples

Public Market Equivalent: “Buyouts underperformed the S&P 500 in 6 out of 29 vintage years, while Venture Capital underperformed the S&P 500 in 16 out of 29 vintage years.”