Angellist's Head of Data Science: "Are LPs Too Selective in Venture?"

A conversation with AngelList’s Head of Data Science, Abe Othman

By Collin West

We asked Abe Othman, PhD, the Head of Data Science at AngelList, why limited partners (LPs) should back more emerging managers:

“There has been a phrase repeated throughout Silicon Valley – that the median venture capital fund loses money. This has not been true for the past decade”. Outside of the Great Recession, the median VC firm has been doing well and returning strong cash-on-cash returns to LPs.

Given this situation, Abe suggests, “LPs should write more smaller checks, particularly to emerging early-stage managers. 50% of the managers you talk to will be at the median or above. And the median returns have been pretty good.”

Perhaps more importantly, instead of backing the same handful of existing funds, LPs should pay close attention to their emerging VC manager exposure to make sure they gain access to the next set of big wins. This is specifically important in the context of early-stage VC, where the cost of missing out on a ‘win’ can be very high, given the power law of returns in VC. The risk is missing out on the next 10x fund - and not having a continued allocation into future funds from those managers.

A Good Source for More Reading
A recent NBER paper by our friend and VC researcher/professor Steven N. Kaplan et al. uses unprecedented LP-level data from Burgiss to examine the performance of different quartiles of venture funds and the returns of emerging managers compared to managers’ repeat funds. One intriguing finding relates to how persistence of VC fund returns across successive funds appears to have substantially diminished post-2000 – meaning backing the same established firms may not work as well as it has in the past.