Survivorship Bias in VC: How Much of “Conventional Wisdom” Is Actually Wrong?

The more time I spend in venture, the more I realize how many of our industry’s “truths” are likely built on survivorship bias.

So many maxims I hear every day sound to me based on a few data points – survivors. The data and my lived experience is so much more nuanced.

A few examples – feel free challenge me on these:

1. “Lean into winners. Concentration is the key to returns.”

I hear this often. It leads VCs to believe that higher ownership is better in all cases. Yet my experience is diversification matters more than people admit especially given the randomness of our business. We rarely know at the early stage which are the “winners.” Concentrating capital in ultimate failures will certainly not lead to good performance. Concentration is clear in hindsight, not plan in foresight.

2. “First funds outperform.”

Only if you look at the firms that survived. The ones that didn’t survive? Their “Fund I outperformance” never shows up in the data because they never raised a Fund II. We selectively study the winners and ignore the graveyard.

3. “The best returns come from holding stock after the IPO.”

Sure! That is, if you backed Facebook or Google! One VC told me he did the math and it was a toss up – basically 50/50 so why trust early stage managers to act as public market investors? (other than fees and carry of course 😉

How much of this is true in other industries and life? We improperly index on outliers. This feels like a costly mistake.