How much do investors make on average on VC? I mean, OpenAI is hardly a startup. But VC money can't be a one way street forever. So either:
- VC invests on the whole sensibly and makes a return that justifies 10-15 year lock-in
- VC has somehow changed and is now unsustainable, it is a one way cash flow and it will blow up like MBS did
- VC sustainably delivers mediocre returns and gets some money in, some money out, but nothing special
Im not sure which it might be.
> make on average
This completely misses the boat on venture capital, which is almost by definition the riskiest of all risky bets. Any smart LP throwing $X into a fund has a portfolio valued, at the very least, at 100 if not 1000 times X. It is simply the way to expose the high-risk portion of the portfolio to that level of risk at the size of the investment needed. Being high-risk, probably it will return nothing. But it might not.
It is the average that matters in the end. How much new money flows into VC per year? Some number of $1e9 - hundreds perhaps? What happens to it?
If its all a folly and the money is burnt, it cannot last. But otherwise, these VCs investing at what looks like crazy valuations can't all be idiots.
EV is not a reasonable metric here. When the ventures are 99+% likely to fail, and individual funds don't invest into more than a few handfuls of companies, you don't have enough variance to promise that fund returns will approach some kind of average. As long as at least one VC fund produces the kind of returns necessary to attract that level of investment at that level of risk, then what matters is not some kind of an average but the managing partners' reputations and networks.
> it cannot last
It cannot last because VC managing partners are human and are subject to human frailties, greed and pride among them. If most actively traded funds cannot succeed at producing sustained above-market returns over time (i.e. making active stock market picks, compared to index funds), then what else other than hubris could suggest an ability to pick unproven startups, sustainably, over time?
How often playing with someone else's money happens? Investing in the top name sounds prudent to your investors or at least is reasonably inside the lines. Then you just skim of your cut on the capital given to you to invest. And while this is happening the numbers going up makes the valuations look good. Even if all the money was already burned.
I would bet on #3
I mean it could be the investor knows the company wants to IPO and expects to make quick cash before they go public. Given the size of the company, it could be a short term play where they expect them to IPO at 500B in the next year or two
#4: VC takes more risk (in the form of portfolio volatility on longer time horizons; look at the post dot com bust returns) and since capital markets in the US are reasonably efficient they get more expected returns for that risk.