General Partner math
I chuckled when I read this entry on PEHub today. According to a study done by Peracs, 77% of private equity funds could manipulate the benchmarks they compare themselves to in order to claim to be in the top quartile (25%) of all funds. I guess just about all the funds are way above average.
If you read this carefully, it doesn't say that 77% of funds do this, just that they could. But, most VCs do claim that they have strong performance. And, of course, many of them can't. I remember my first day at MIT when then President Paul Gray said to the freshmen picnic "all of you were in the top 10% of your high school class, but 50% of you will finish in the bottom half of your graduating class at MIT." It wasn't exactly a pep talk, but it was a dose of reality for many students who had never finished anywhere but on top.
And VCs have some of the same issues. Most are bright and high-achievers. But, if you face the reality of the low VC returns from this decade, half of them must be below that. So, unless they monkey with the benchmarks as Peracs suggests, half of the VCs would have to admit that they are below average. And, the average isn't very attractive.
All of this means that the VC industry has to contract. Limited Partners are figuring out that they can't keep pumping money into this asset class. Some firms have strong performance and a good reason to believe that they'll continue to do so. Others have niche or regional strategies that aren't over-crowded. But the rest may have to come up with some creative mathematical marketing to justify their existence.
I think it was George Carlin who said something like "Imagine the average American. The scary part is that half of America is dumber than that!"
Update: Shortly after I wrote this, the NVCA released their latest VC performance numbers. Not very pretty.