Working at a venture fund isn’t diversified enough for you?

A colleague who works at a venture capital fund of funds once told me that he wouldn’t work in VC because it wasn’t diversified enough. Say what? I thought VC firms were diversified because they invested in a portfolio of startups. True. But you can get more diversified than that.

A venture capital fund of funds is a fund that invests in venture capital funds on behalf of limited partners (LP). The LP may not want to invest directly in venture capital funds. For example, the LP may not have the expertise to choose good VC funds, or may not have access to good VC funds, or may be too small to invest in its target funds, and so on. There are a bunch of reasons why an LP would go with a fund of funds rather than directly investing in venture. The downside is that the LP has to pay management fees to the fund of funds and the venture funds.

Back to my colleague who doesn’t want to work in VC. His logic goes like this:

I don’t want to work at a startup because it could fail. So I will work at a venture fund that is diversified across a bunch of startups. But wait, the Partners at the venture fund could end up investing in bad companies, so the venture fund could fail. So I will work in a fund of funds that invests in venture capital funds. But wait, the Partners at the fund of funds could end up investing in bad venture capital funds so I will work in… ?

I don’t think there is anything wrong with this reasoning. It is peculiar — in a good way. The only way to end this infinite recursion is to work with the best people you can find at any level of abstraction.

And for God’s sake, never work at a startup. Way too risky! (Note: The tongue is in the cheek.)

And if you’re wondering if there is a higher level of abstraction than working at fund of funds, I suppose you could work at an LP. There you would be investing in hedge funds, mutual funds, VC funds, stocks, funds of funds, energy, timber, real estate, private equity, you name it. But I imagine anyone at an LP who receives carry (a cut of the profits) is working in a specific sector with short-term returns. Such as an internal hedge fund. Thank you and goodnight.