Techcrunch’s piece on venture returns seemed a little optimistic to me when I read it. And @cdixon agreed–pointing to the Calpers data which I have used before.
What is good about Calpers CEV program is that it is a massive program of investment into VC funds. While it misses many of the locked-up super-stellar West Coast VCs (like Sequoia), it is a fair bet that Calpers is a choice LP for many VC funds.
As a caveat to my analysis: I am not a trained financial analyst, so this is best efforts. Since I don’t have the dates of either draw downs and disbursements, I can’t calculate precise IRRs. Someone with more time could build a probabilistic model of this, if you need.
Headline numbers: Calpers put $3bn into CEV from 1999 to mid-2009. By that point, the net value (in terms of cash paid out and the book value of investments held) was $2.86bn, representing an overall loss of 6.4%. J-curve affects aside, this suggests that venture has returned less than zero over the past decade.
What was really suprising was this: the 2000 vintage funds (a year when CEV put to worked $1.1bn) far from performing poorly during this glut of venture, actually returned 12.6%.
The bumper year was for 2003 vintages, born in the pit of post-9/11 gloom — returning 84% over the 6 years to Calpers. This was also the leanest year for venture investing by Calpers.
By vintage, here is what the cash-in/cash-out:
1999 : In: $189m ; out: $160m . Overall return: -15.5%
2000: In $1.1bn ; out $1.25bn. Overall return: 12.7%
2001: In $562m out $ 538m. Overall return: -4%
2002: In $281m; out $319m; Overall return: 13.3%
2003: In $93.7m; out $172m; Overall return: 84.6% <—- lowest funds raised, best return
2004: In $125m; out $117m ; Overall return: -6.5%
2005: In $146m; out $133m; Overall return: -8%
2006: In $103m; out $52m ; Overall return: -50% — but in reality these funds have just stopped their investing period and are in as deep a J – as possible.
2007 In $254m;
2008 : In $146m
2009: In $57.5m
It is hard to be optimistic about 2005 and 2006 vintages. The companies backed by these funds would have steamed straight into the credit crunch, while at their most expansionary. If they read Sequoia’s Good Times RIP, they may well have dodged the bullet but most probably didn’t.
Of the 186 firms Calpers invested in with, only 31 returned 12% or better–I choose 12% as it is a better than stock returns; or around one third. 12% is far from a stellar investment return.
Stellar starts at 16-18% over your career (a sort of Paulson-esque number), if we take it to 16%, then 20 Calpers GPs hit that hurdle, which is bang on the halcyon top quartile GPs aim for.
What to make of this?
Well Calpers may have selection bias since it disagrees with the NVCA data. I may have made an error too.
It definitely demonstrates how difficult a business venture is. And massively asymmetric. It is well understood that the bulk of returns go to a few firms and a few partners within a few firms. (Calling Fred Wilson, Roelof Botha, anyone?)
But it also remains the case that as an LP, you have a better than even chance of doing really badly. 125 out of 186 firms return less than 4% which is a blue-chip granny bond rate. Fully 60% lost money. The logic of investing in VC must be something that treasurers are looking at. Not because VC isn’t necessary–as founder of a tech startup, I need capital to support my business–but that LPs have been investing in a losing game, probably because it is sexy and not timber (a great thing to invest in in the 90s). And with the fee structure (which I have questioned in the past) massively incentivising GPs to raise large funds (and become rich whether or not their LPs become rich), the asymmetry has led to pension funds chucking money away.
Even as I write this I realise there is no easy answer to this general conundrum. One thing I do believe would help would be greater transparency–from VCs about the deals they have done and the returns they have made. And from journalists digging harder at the numbers. And from entrepreneurs being honest about how much capital we need and what we plan to do with it.
And with that it’s good night.
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