Why do the largest venture firms consistently top industry rankings?
Indeed, how is it possible that Tiger Global scores higher than Founders Fund in the recent VC ranking from Ilya Strebulaev and Blake Jackson?
The simple explanation is that any ranking based on a cumulative score, rather than a normalised rate or efficiency metric, will reward scale over quality and favour larger firms with more activity.
If the objective of the ranking is to reflect impact or relevance that's fine, but it should not be perceived as a ranking of performance.
A simple way to address this (with Strebulaev's data and methodology) would be to divide the sum of net profits by the total capital the firm deployed.
Quality Score = (Sum of all individual Net Profits) ÷ (Total capital the firm deployed across all investments)
The output would be a capital efficiency ratio, similar to TVPI but accounting for overvaluation, monitoring, dilution and human-capital decay, etc. A more useful lens on quality.
There's a second problem, as some of these firms have changed their strategy dramatically over the last 15 years, particularly those which have scaled significantly. So any attempt to correct for AUM will not fully recognise recent scaling.
A better result might come from calculating a "horizon capital efficiency", putting looking at returns within the window of a typical fund term.
(Sum of Decayed Net Profit from investments in last 10 years) ÷ (Total capital deployed in last 10 years)
Some exits take longer than a decade, and this will trim those from the data. However, delayed liquidity is bad for the ecosystem and firms should be rewarded for successful exits delivered within the fund term.
Without the underlying data, we can still approximate the outcome by comparing the Strebulaev-Jackson score to an exponentially weighted moving average of fund size (to account for scale while favouring more recent data). This will produce a rougher result that the fully updated methodology, but a useful indication of direction.
The resulting ranking (full list of 50 in the PDF linked below) is more intuitive if the objective is to understand firm quality.
The top 5 gains from this update:
1)
@usv ( 37 places)
2)
@firstround ( 36 places)
3)
@svangel ( 30 places)
4) Inflection Ventures ( 28 places)
5)
@Lux_Capital ( 27 places)
The new top 5:
1)
@svangel
2)
@RibbitCapital
3)
@benchmark
4)
@sequoia
5)
@kleinerperkins
Full analysis, methodology and ranked list of 50 linked in the post below.
Finally, there's also a good argument that the approach to overvaluation (based on Gornal and Strebulaev's prior work) should factor what drives overvaluation: volume of venture dollars consumed, which may further shape the outcomes in favour of smaller firms.
e.g. A private company that has raised ~$200M from VCs is structurally more inclined to overvaluation than a company that has raised ~$20M.
N.B. This is not a criticism of Strebulaev and Jackson's work, which is excellent. They deserve full credit for the quality of their analysis and the transparency of their methodology. My intent is just to provide a different perspective.
