Venture capital is not the public markets. But that hasn’t stopped LPs from trying to apply public equity frameworks to private market investments -with mixed results.
The instinct is understandable. LPs are under pressure to quantify risk, compare strategies, and justify allocation decisions to committees that think in benchmarks and drawdowns. But most public market metrics break down in venture -or worse, they create false confidence.
Still, that doesn’t mean LPs can’t learn anything from public market thinking. It just means they need to be selective.
What Doesn’t Translate (At All)
1. Sharpe Ratios
Risk-adjusted returns are useful when you can mark assets to market and trade in and out. Venture portfolios are illiquid, unevenly marked, and power-law distributed. The idea of “volatility” as a risk proxy simply doesn’t apply.
A single fund may look “calm” for years -until a 40x outcome hits in year 8. You can’t optimize venture for smoothness. You optimize for convexity.
2. Time-Weighted Returns
TWR assumes re-investable, liquid capital. Venture capital is committed, not allocated. The IRR of a venture fund depends heavily on capital calls, exits, and timing that the manager barely controls. Comparing fund IRRs to TWR benchmarks is apples to asset-backed-mirages.
3. Diversification Math
In public equities, diversification reduces risk. In venture, it often blunts returns. A 30-company portfolio might be diversified -but if none of them return >10x, you’re underwater. The “more shots on goal” logic only works if the manager can consistently access outliers. Without edge, diversification is just dilution.
What Actually Does Translate
1. Capital Discipline
Public equity managers are (in theory) rewarded for capital efficiency. In venture, that same discipline shows up in fund pacing, reserve allocation, and cost control at the portfolio level.
The best VCs in 2025 are pacing slower, reserving smarter, and avoiding “dumb follow-ons.” They don’t write checks just to defend paper marks. That mindset -capital as a finite resource, not branding fuel -should feel familiar to LPs from public market backgrounds.
2. Position Sizing and Conviction
In both asset classes, your sizing reflects your beliefs.
In venture, that means:
- How big is the first check?
- How much reserve capital is available?
- When do you double down -and when do you walk?
LPs should interrogate this like they would a long-only PM’s top five holdings. You don’t want to back a manager who throws $250k into every startup and hopes the math works out. You want to back someone with portfolio construction discipline -and the courage to concentrate capital when the signals are there.
3. Exit Discipline
Public equity investors track their sell decisions obsessively. In venture, too many GPs treat exits like divine intervention.
But the best firms:
- Engineer secondaries when private valuations get frothy
- Push for M&A when IPOs aren’t viable
- Actively manage hold periods based on actual upside potential -not inertia
LPs should ask GPs: What’s your exit philosophy? If the answer is “we let founders decide,” that’s not stewardship. That’s abdication.
A Better Mental Model for Venture LPs
Instead of forcing public metrics onto venture, LPs should build a hybrid framework that respects the realities of the asset class. That means focusing on:
- Access & Edge
Where is the GP sourcing from? Are they seeing the right deals early, or just overpaying for consensus ones late? - Portfolio Construction
How are they sizing checks, reserving capital, and managing ownership across rounds? - Return Shape
Not average IRR -distribution. How many companies returned >5x? >10x? What’s the loss ratio? - Operational Leverage
Is the GP adding value? Do founders re-up? Are companies performing above market? - Liquidity Management
Are there secondaries? Are realizations happening? Can the GP return capital in any market?
And above all: Are they consistent? Venture is hard to benchmark. But internal consistency -in thesis, execution, pacing, and outcomes -is a hallmark of strong managers.
Bottom Line
Public market heuristics aren’t useless -but they’re not gospel in venture.
If you’re an LP applying Sharpe ratios and drawdowns to a venture portfolio, you’re not managing risk. You’re mislabeling it.
The better approach? Treat venture like what it is: a game of power laws, access, and timing -not volatility smoothing.
You don’t need public metrics to underwrite a fund. You need clarity on what the manager believes, how they behave, and whether their portfolio construction reflects conviction -or confusion.