Why Do Sequoia and USV Only Pick Winners 4 to 7 Percent of the Time?

Jeff Morris Jr says Sequoia, USV, and the other best venture firms have historically turned only 4 to 7 percent of their companies into investments that return the whole fund, and he does not know if that is still their rate.

A picking rate is the share of companies that become fund-returning investments, meaning they return the entire pool of capital, one times the fund. At 4 percent, a top fund needs 25 companies to expect a single one that returns the fund. He thinks those historical rates have already fallen, so the old range is only a direction. A newer manager has to ask whether the companies they see are as good as the best firms in the world. He says the honest answer for most people is no, which means a larger portfolio and more shots. Nearly every investor he talks to believes they source better companies or have better judgment. The useful admission is that a manager cannot honestly claim their companies are better than the best firm's.

Asked whether a new manager should open with a $100 million fund, he says the mistake he sees is a first fund that is far too big. A manager can get into business with a $3 million or $5 million fund.