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Lawsuit Could Expose Whether Top VC Firms Are Actually Good Investments
curtwoodward writes "Venture capitalists like to project the image of wise kingmaker, financial alchemists who have a unique gift for spotting the Next Big Thing. They do not like having anyone see data about their performance, which has been generally lackluster over the past decade. This can be a problem, however, when VCs cash big checks from investors at public pension funds — taking taxpayer money sometimes comes with public disclosure. That's the crux of a court fight happening in California, where the state's massive university system is resisting attempts by the Reuters news organization to decode a complex shell game intended to hide the return data of two giants of Silicon Valley: Kleiner Perkins Caufield & Byers and Sequoia Capital."
Venture capitalists ...financial alchemists who have a unique gift for spotting the Next Big Thing
No, they don't. What they do is invest in many different things that they think may have potential - they spread their bets. Couple that with deals where they get paid first at the ROI they demand (+40%), screwing over the initial founders in the process.
AND they use other people's money while making sure they get a big cut in fees and whatnot because of their "expertise" while giving their investors returns that don't quite warrant the risk they are taking.They, the VCs, can't lose - the founders and the investors take most if not all the risk.
The only thing these guys have is connections to money and a lucky hit or two.
Whether or not the returns from private equity are better than the public markets has been controversial for a long time.
However it is well known that other aspects of these markets are undesirable for investors. Lack of disclosure, poor liquidity and negative scaling are some of these.
http://www.economist.com/blogs/freeexchange/2012/09/private-equity
Given the lack of clear benefits and the well-known problems with these funds it's pretty obvious that pension funds should not be invested in these instruments.
On the other side, startups tend not to have audited financial statements, so it takes a lot of leg work for the due diligence.
Audited financials are somewhat overrated. See Enron. It's not terribly hard to make financial statements too confusing to interpret. I defy anyone reading this to look at the financial reports of any large bank and tell me how much risk they are exposed to or what their investment portfolio looks like. A VC will still have to do a ton of legwork for any company they plan to invest in.
Disclosure: I'm am a certified accountant.