Below are some key takeaways from our webinar conversation with a notable institutional allocator: 1. Venture Capital (VC) is an asset class with massive dispersion in returns between managers When looking at the industry as a whole and examining average returns across different types of private alternatives asset classes, VC looks like a very attractive asset class - averaging 16% annually in the data below. But when exploring the data further, you find a significant variance in returns between managers and realise that you only want to be invested in the top quartile of managers to seek returns in excess of 25%: It is a very skewed bell curve. PRIVATE MARKETS: ASSET CLASS PERFORMANCE Annual Returns of Key Alternative Investment Indicies Ranked in Order of Performance (2006-2020)* 2. Managers matter Great managers will continue to do well. If you're an entrepreneur, you want to be backed by the very best venture capital firms such as Sequoia Capital, Accel, and Index Ventures. Their brand will positively reflect your business, which will help when raising capital at later stages. This is a clear self-selection bias that contributes to the significant range in returns in the VC industry. The best managers remain in the top quartile for extended periods. 3. Appreciate the importance of diversification You need to diversify your allocation to venture capital across strategies and vintages. Returns can take a long time, and vary year on year, so it's important to be diversified across vintages. Different strategies perform better in different cycles, and all have different risk profiles. For example, pre-seed investing is far riskier than at a later stage as young businesses have a far higher failure rate. However, if you're in a seed round for Twitter you can expect to make 1000x your money, whereas when investing in the later stages, the maximum expected returns are far more modest. Investing in a venture capital fund of funds allows a one off investment in VC to be spread across multiple vintages (usually 5 or 6) and multiple strategies. 4. Investing in VC is a relationship driven game When investing in a venture capital fund you are really investing in the managers, and the individuals in that team to select the companies with the best growth prospects to deliver returns. This due diligence in understanding a fund's team can be highly time consuming as this is an essential quality of the funds. What matters most is the ability to pick the winners because what they will deliver will outweigh the fees. It is vital to build relationships with the GPs responsible for the high returns, as these are the managers who will continue to perform (as explained in point 2). They will run the oversubscribed funds in future, which will be hard to gain a position in without a relationship. A fund of funds solution capitalises on this, with their fees justified by their ability to place their investor's money into the top decile funds. 5. VC is, in general, a longer term strategy than traditional PE An observed industry trend is that private companies are now taking longer to exit. They are incentivised to stay private longer as the optionality for late-stage capital raising is widely accessible, with a large appetite for late-stage growth investing in the markets. The result is that it takes VC funds longer to realise returns on the investments in their portfolio companies. 6. VC fund of funds investing takes time for returns to be realised Unlike traditional VC fund investing, investing in the asset class through a fund of funds (FoF) manager typically adds 2 to 3 years to the capital commitment term. This extra time is dedicated to doing due diligence on the VC fund managers and committing to partnerships with them.