Correlation Between GP Experience and Fund Performance
Do the funds of first-time managers perform better or worse than experienced managers?
Dec 6, 2020 — 3 min read
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AngelList lowers the barriers to entry for emerging GPs to get started in Venture Capital. As a result, AngelList has expansive data on the performance of emerging managers. We wanted to use our funds data to answer two questions:
- Do the funds of first-time managers perform better or worse than experienced managers and
- Does the performance of a manager’s prior funds have any predictive value for their future funds?
Since the near-term IRR of funds can be unrealistically high, we restricted our analysis to only the 167 AngelList VC funds with an effective duration longer than one year. (This restriction means that Rolling Funds™ were excluded from our analysis, since they are a more recent product.)
First Time vs. Experienced Managers
We grouped funds by their order in a lead’s investment history: first funds, second funds, and third or later funds. The y axis is IRR per year net of fees for those funds.
These results suggest that a manager’s first and second fund don’t seem to be significantly different than a fund picked at random. Third or later funds appear to have higher performance, a phenomenon that we will revisit shortly.
The Persistence of Manager Performance
A manager’s Fund II has to come after their Fund I. That means (in general) for a given manager, we would expect their Fund II to have a higher IRR than their Fund I, because IRRs tend to fall over time. How can we align the performance of a GP’s Fund I and Fund II?
Fortunately, we’ve already built a tool that is designed to calculate values for venture funds of different recent vintages: our VC Fund Performance Calculator, which takes as input the net IRR and net TVPI of a venture fund and returns a 0 to 100 percentile of performance based on AngelList and external benchmarks. (You can find out more about our Fund Performance calculator from its introductory blog post.)
This plot shows the current performance of a GP’s first fund (x axis) with the current performance of GP’s second fund (y axis).
The (Spearman) correlation coefficient here is 0.12, which suggests essentially no relationship between the performance of a manager’s first and second fund.
The Exceptions that Prove the Rule
The table above seems to show that a manager’s third or later funds have better performance than their first two funds. But how could third and later funds have higher performance if the performance between funds is largely uncorrelated?
The answer, in part, appears to be due to the relatively high fund performance of two of AngelList’s most prolific managers: AngelList founder Naval Ravikant (7 total funds) and Mercury founder Immad Akhund (9 total funds). These two GPs are responsible for five of the six highest-performing funds in the third-or-later-fund bucket:
Going forward, both Naval and Immad have transitioned over to our new Rolling Funds product.
Disclaimer
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. This document and the information contained herein is provided for informational and discussion purposes only and is not intended to be a recommendation for any investment or other advice of any kind, and shall not constitute or imply any offer to purchase, sell or hold any security or to enter into or engage in any type of transaction. There is no guarantee that any fund will achieve the same exposure to or quality of portfolio companies held by any existing angel or fund. An investment in venture funds involves a high degree of risk and is suitable only for sophisticated and qualified accredited investors. Any such offers will only be made pursuant to formal offering materials containing full details regarding risks, minimum investment, fees, and expenses of such transactions. The terms of any particular fund, including size, costs, and other characteristics, are set forth in the applicable constituent documents for such fund and may differ materially from those presented in this presentation. Information on this page is qualified in its entirety by the relevant fund’s investment documents (including, but not limited to, a fund’s limited partnership agreement), which should be reviewed carefully prior to making an investment decision. Please see these documents for full details regarding risks, minimum investment, fees, and expenses. AngelList returns contained in this presentation are as of November 17, 2020. They may include valuation events that occurred (or were learned about) after that date, which is standard practice. We undertake no obligation to provide updates or revisions to reflect any changes in actual or expected returns. For purposes of calculating unrealized returns, investment values are prepared in accordance with the methodologies described below. For early-stage companies, valuations are generally marked up or down to a company's latest priced round. Companies that do not have a new priced round since the last mark are held at the last mark or cost. Investments may also be marked down (but never up) at our discretion. This is an industry-standard method. For later-stage companies, investments are sent to a third-party for valuation if the company is valued over $100M, the investment is estimated to be worth over $10M, and 24 months have passed since the last investment. Smaller investments in later-stage companies are valued using the same method as early-stage companies. Estimated values for early-stage companies do not account for liquidation preferences and other non-financial terms that may affect returns. While AngelList’s valuation sources and company activity updates are believed to be reliable, we do not undertake to verify the accuracy of such sources. Valuations presented herein are calculated by AngelList based on data available to it as of the presentation date and have not been audited by a third party.
