Why Benchmarks Matter: A Case for PME in Venture Capital
I’ve always found it interesting how differently allocators and VCs talk about benchmarks.
For allocators, benchmarks are essential. They’re more than a yardstick—they’re a framework. Benchmarks help allocators assess the health of their portfolio, compare performance across asset classes, and evaluate managers within a consistent, risk-aware context. They also serve a compliance function—many investment committees won’t even consider a strategy unless they can understand how it performs relative to a known index.
For VCs, benchmarks tend to play a very different role. They’re more of a fundraising tool than a performance metric. TVPI, DPI, and IRR might get thrown into a pitch deck, but few VCs benchmark themselves seriously or consistently to public markets or other funds. Part of this is cultural—venture’s built around a narrative of outliers and asymmetric upside. The industry celebrates 100x wins, not incremental outperformance.
That said, there’s one benchmark I think both allocators and VCs should use more often: the Public Market Equivalent (PME).
What is PME?
PME is a method that asks a simple, powerful question:
“What would my return have been if I had invested in a public stock index—like the S&P 500—every time I called capital into a private investment?”
It creates a hypothetical portfolio using the exact same cash flows and timing, but instead of investing in a startup, it buys and sells a public index. This allows you to compare your private investment performance to a public market baseline with the same cash flow profile.
Unlike IRR, which can obscure poor outcomes if capital is returned quickly, PME is grounded in opportunity cost. It gives allocators a much clearer view of whether their private investments actually outperformed the market—or if they would have been better off in a passive ETF.
Why It Matters for Allocators
Allocators have fiduciary duties. They need to answer questions like:
Are our venture investments delivering value relative to risk and liquidity constraints?
Is our VC program beating the market over time?
Should we continue allocating to this manager, or reallocate elsewhere?
PME helps answer all of those. It strips away some of the mystique of venture returns and grounds decisions in actual, time-weighted comparisons to what the public markets offered in the same periods.
It’s not about penalizing illiquid investments—it’s about giving them fair context. And that’s what smart portfolio construction requires.
Why It Matters for VCs
For VCs, PME can feel like a buzzkill. Venture is about swinging for the fences, not hugging an index. But that’s exactly why PME is so valuable—it introduces discipline.
It forces VCs to ask:
Are we truly generating alpha?
Are our exits worth the illiquidity premium we pitch to LPs?
How do our returns compare to an allocator’s next-best alternative?
Framing your fund’s performance this way might feel uncomfortable, but it’s actually a huge credibility boost—especially with more sophisticated LPs. The best emerging managers I know lean into this, showing not just how well they performed but how much better their strategy was than simply buying SPY.
A Quick Caveat
PME has its limitations. It doesn’t adjust for risk, volatility, or drawdown. So while it compares IRRs, it doesn’t necessarily reflect alpha in the strictest sense. Just because your PME is greater than 1.0 doesn’t mean you’re outperforming on a risk-adjusted basis.
But even so, it’s a step in the right direction. It’s one of the only ways to translate venture returns into language allocators understand.
Bottom line: benchmarks like PME don’t just measure outcomes—they elevate the conversation.
