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From 1997 to 2012, less cash was returned to investors than invested in VC. Given where we are in the cycle, revisit this venture study for a sobering read of what a bear market for the industry may look like. Not unlike hedge funds today I suppose. gigaom2.files.wordpress.com/2012/05/vc-ene…
The Kauffman Foundation began investing in VC funds in 1985 and has been a limited partner in more than 100 funds managed by more than sixty General Partners, many of which have been considered “top-tier.”
"We conducted historical performance analyses of our VC portfolio and results show chronically disappointing returns over most of the twenty years studied, no matter which way we slice the data—IRRs, investment multiples, or PME. This was a surprising and unexpected conclusion."
"The cumulative effect of fees, carry, and the uneven nature of venture investing ultimately left us with sixty-nine funds (78 percent) that did not achieve returns sufficient to reward us for patient, expensive, long- term investing."
"Half of the VC funds in the Kauffman portfolio failed to return investor capital. Almost all (93%) of large funds failed to return a “VC rate of return” of more than twice the invested capital, after fees. The mean net multiple in our portfolio of ninety-nine funds is 1.31x."
"Returns data is very clear: it doesn’t make sense to invest in anything but a tiny group of ten or twenty top-performing VC funds, investing in small cap public equities is better for long-term investment returns than investing in second- or third-tier VC funds."
"Cambridge Associates data show that during the twelve-year period from 1997 to 2009, there have been only five vintage years in which median VC funds generated IRRs that returned investor capital, let alone doubled it."
"From 1986–1999, 29 top funds invested $21 billion and returned $85 billion, while the rest of the VC fund universe invested $160 billion and returned a scant $85 billion."
"Average VC compensation is not really performance-based at all. VC funds receive nearly two-thirds of their revenues from fixed fees rather than from performance-based carry, which means VCs get paid more for raising bigger funds whether or not they perform."
“There is some truth to the old adage “you get what you pay for.” Under the existing 2 and 20 structure, many institutional investors pay GPs well to build funds, not build companies. As one GP told us: “The management fee is like heroin. No one can step away from 2 and 20.”"
"A surprising number of funds show early positive returns that peak before or during fundraising for their next fund. Committees should be wary of J-curve-basis for VC investing, a steady erosion of both IRR and investment multiple occur over the average fund’s remaining life."
In the next VC bear cycle, investors will most certainly look to negotiate better GP/LP alignment, reduced fees, transparency, governance reforms, and terms that take into account the skewed distribution of VC fund returns. All good things come to an end, eventually.
