The Illusion of Variance: Why LPs Are Buying Identical Correlations in Different Vintages

Aki Kakko
44 minutes ago
4 min read

If you listen to the whisper network of Limited Partners, Family Offices, and Funds of Funds, a specific set of heuristics for Venture Capital success begins to emerge. Recently, a compilation of these "Predictors of Success" circulated, highlighting what capital allocators actually look for when choosing General Partners. The advice included:

On Manners: If you ask for money, adhere to the LP’s calendar. The “warm intro” followed by an assistant battle is a proxy for how you treat founders.
On Momentum: Luck begets luck. You need one "home run" to get into the "right network flows." Before that, you are hunting; after that, you are fishing.
On Diversification: LPs want a "basket of options." They prioritize vintage diversification (investing across different years) over betting on a single fund cycle.
On Misalignment: LPs prefer to front-load fees (Years 1 and 2) to build the team early, hoping for carry alignment later.

On the surface, this is rational advice for navigating the current landscape. But if we zoom out, these points are not predictors of innovation; they are symptoms of a stagnant industry optimizing a broken machine.

They reveal a terrifying truth about the asset class: LPs think they are buying a diversified basket of options, but they are actually buying an option on a basket of identical correlations.

The Vintage Diversification Fallacy

The most dangerous piece of conventional wisdom is the idea that "vintage diversification" equals safety. The logic holds that because tech cycles fluctuate, investing in a firm’s 2020 fund, 2022 fund, and 2024 fund smoothes out the risk. This is a category error. Diversification requires variance. It requires uncorrelated inputs and distinct execution strategies. Yet, look at the underlying mechanics of almost every fund in that "diversified" basket:

Same Geography: 80% capital concentration in the Bay Area, NYC, and London.
Same Signal: Reliance on warm intros and network consensus.
Same Pattern Matching: A bias toward pedigree (Stanford/ex-Google) and narrative over raw data.
Same Structure: The rigid 10-year closed-end fund model.

If you invest in ten different funds that all read the same newsletters, chase the same hyped rounds, use the same manual selection processes, and operate on the same liquidity timelines, you have not diversified. You have merely leveraged your exposure to the Consensus Monoculture.

You do not have a basket of options. You have a single bet on the status quo, spread across different bank accounts.

The "Luck" Trap and the Failure of Systematic Discovery

The observation that "luck begets itself" and that a GP needs a home run to enter "the right network flows" is an admission of market failure. In an efficient market, capital flows to the highest potential utility. In Venture Capital, capital flows to those who have already won. This is not investing; it is momentum trading. When an LP says, "Everything else is hunting deals instead of fishing," they are acknowledging that the industry relies on Access Alpha—the privilege of knowing the right people—rather than Insight Alpha. This reliance on "flow" is why the industry misses the non-obvious outliers. If you are waiting for a deal to flow to you because of your reputation, you are by definition seeing opportunities that have already been filtered through the consensus layer. Meritocratic.Capital does not wait for "luck" to provide flow. It builds infrastructure to mine it. We move from hunting (manual outbound) and fishing (passive inbound) to farming—systematically cultivating the entire landscape of data to find yield where no one else is looking.

The Fee Structure Paradox

The preference for front-loaded fees (paying the most in Years 1 and 2) is the final nail in the coffin of alignment. By paying GPs to deploy capital rapidly in the first 24 months, LPs incentivize Speed over Precision. This structure forces GPs to play the "Hot Ball" game—getting into whatever rounds are moving fast—rather than doing the deep, slow work of underwriting complex infrastructure or deep-tech opportunities. This connects directly to the LP complaint about scheduling: "If you're asking to meet me... be flexible to my calendar." While valid on a human level, this highlights the "Beggar-King" dynamic of modern VC. The GP is a petitioner, and the LP is a gatekeeper. Both are trapped in a social dance that has nothing to do with the underlying asset.

The fact that "how you schedule a meeting" is a proxy for "how you will win deals" proves that VC is still operating as an artisanal guild, where soft skills outweigh systematic analysis.

The Case for Structural Variance

To truly improve returns, we must stop optimizing the behavior of the artisan and start redesigning the factory. Real diversification—Meritocratic Diversification—looks like this:

Strategy Variance: Moving away from "Pattern Matching" to "Data-Driven Discovery."
Structural Variance: Replacing the 10-year closed-end fund with Permanent Capital structures that allow compounding to work (as discussed in The Industrial Slope).
Geographic Variance: Ignoring the "Warm Intro" to find the genius coding in a basement in Lagos, Vilnius, or Jakarta who has no connection to a Silicon Valley GP.

The current LP playbook is designed to select the best horse in a race where all the horses are lame. It minimizes embarrassment, not risk.

If we want to escape the trap of low returns and high fees, we must stop asking GPs to be more polite or to get "lucky" with their first fund. We must demand a new physics of investing—one where the variance comes from the strategy, not just the vintage.