Do Venture Capitalists Beat Random Allocation?

TL;DR

This study compares venture capital portfolios to randomized benchmarks and finds that VC outcomes are largely indistinguishable from random allocation, questioning the presence of skill.

Contribution

It introduces a constrained random benchmark for VC portfolios and demonstrates that empirical results closely match this benchmark across funding stages.

Findings

VC portfolios are statistically similar to random benchmarks.

No evidence that portfolio construction improves high-multiple outcomes.

Even top portfolios do not outperform rank-based random expectations.

Abstract

Venture capital outcomes are dominated by a small number of extreme successes, making it difficult to distinguish investor skill from favorable realizations in a highly skewed return distribution. We study this question by comparing empirical VC portfolios to a constrained random benchmark that preserves key portfolio characteristics, including timing, geography, sector composition, and portfolio size, while randomizing individual company selection. Across funding stages, empirical portfolio distributions appear remarkably close to their random benchmarks. We find no evidence that portfolio construction increases the probability of high-multiple outcomes: the right tail remains statistically indistinguishable from random allocation. Deviations in the lower part of the distribution are small and sensitive to the interpretation of zero outcomes, suggesting at most weak evidence of downside improvement. We further introduce a rank-based benchmark distribution to evaluate outperformance at each position in the cross-section. This analysis shows that even the best-performing portfolios do not exceed the outcomes expected for their rank under random sampling. Our results suggest that VC portfolio outcomes are largely consistent with constrained random allocation, highlighting the difficulty of identifying aggregate skill in heavy-tailed investment environments. A similar conclusion holds for the performance of financial analysts in predicting future earnings.