That's been true since about 2000.<p>From the 1970s to about 2000, venture capital firms as a class were profitable. Since 2000, venture capital as a class has been a lose. What keeps this going is that each VC thinks they're better than average. Most of them are wrong.<p>Venture capital in Silicon Valley used to be about finding someone who had a good technical idea, and getting them enough money to make a working prototype or a small production run. New technology and intellectual property were the key. That was a good business.<p>In the first dot-com boom, this changed. Technology wasn't the issue. It became about buying market share to achieve a "first mover advantage". That resulted in a focus on growth and a race to out-spend the competition. There were winners and losers, but in the end, mostly losers.<p>In this, the tail end of the second dot-com boom, we see the same pattern. The big difference this time is that nobody is going public. There's just round after round of private capital. The extreme case is Uber, with a valuation greater than General Motors while still losing money at a huge rate.<p>This is fueled by low interest rates. There's so much capital sloshing around looking for yields that too much money is being funneled into marginal companies. That's why there are no IPOs; it's cheaper to borrow.
I find this argument inadequate. The conclusion may be true (that most venture funds lose money) but this article does a poor job of elucidating why this may be the case. There are many directions we can approach this from.<p>First, to simplify, instead of talking about an A and B and having 25% ownership after these rounds. Let's assume $10M is invested in the A for 25% ownership ($10M on a $30M pre-money valuation / $40M post-money.) Of course if each of these companies exits at exactly $50M and money just sits there for 10 years then the returns will be garbage. But in reality if you're investing at a post-money of $40M, very few of your companies will exit at $50M.<p>What actually matters here is what happens with money after exits. If money is returned to investors immediately, then what we want is to solve:<p>$100M * (1.12)^Y <= .25 * (exit price)<p>For example, if ONE company goes from $40M post and exits at $562M after 3 years, and then this money is distributed back to investors, then investors receive .25*$562 = $140.5M as a return, which is more than 12% per year for these three years ON THEIR ENTIRE $100M investment. (This assumed no subsequent dilution but you get the idea.)<p>If money isn't returned directly to investors then it needs to be re-invested. The point is, of course your venture returns will be poor if you just place your cash under a mattress post exits. The math becomes much more favorable for the VCs with realistic time assumptions.
My biggest criticism of this analysis is his wild overstatement of the benchmark return. Where in the world do you get 8% safely in equities and/or real estate? It's more like 3-5% because the world is awash in capital with precious few places to put it into play.<p>Which in a way would support his main point more strongly: venture returns are inevitably coming down from 12% to 7 or 8% annually.
great post but it misses several important dynamics (in addition to subtler effects):
1. LPs invest in multiple VCs - they have their own portfolio effect.
2. not even VC investment is equal -- there's 10-50x difference between their largest and smallest bets.
3. there's non-financial benefits to being an investor in Uber (and doubly, for being able to say it publicly). There's no benefit in saying you're an investor in the stock market. Subtly, if you're a top VC and NOT an investor in enough Uber's (and only investing in unknowns) then LPs and entrepreneurs don't take you seriously.<p>These effects combine to dampen the effects you mentioned. Consider FriendFeed - small $50M acquisition by Facebook, but given its non-financial impact, do you think the VCs regretted the investment? They'll make their $$$ somewhere else, perhaps the entrepreneur's next startup... which turned out to be quip, acquired for $750M last week...
I don't quite agree with the math and illustrations.<p>If they put in 10M, get 25%, and exit is at 50M, that approximately zero growth over valuation (probably down from series B)
This is why VCs don't always take series B, and series A is much smaller so they can place more investments and see which ones are worth it.
A 100M series A fund with only 10 deals seems unrealistic.<p>Six years is not enough to IPO for most startups. Much less 4, if the A comes towards the end of the placement phase. That's not a change that helps anyone.
> Screw traditional investors, move to the “cloud”. We should be able to find better access to capital that isn’t looking for 12% returns. Can’t we find investors willing to get a 8% stable yield in a $1B+ fund diversified over hundreds of startups?<p>8% return means returning 2x in 10 years. The author /already told us/ that 85% of venture funds are unable to do even this. How will this "cloud" diversified fund do better than 85% of funds?
VCs are just doing the same investment strategy that record labels used to do... before file sharing decimated their mechanical royalty agreements. For every Britney Spears, you had 10+ other acts that could barely produce a break-even single. It's highly Pareto-driven.<p>Combine that with the fact that 2016 has only seen 7 tech IPOs...<p>And the fact that investment in sub-25M cap is dead thanks to Sarbane-Oxley/Basel III...<p>And GDP growth forecasts being cut by the IMF...<p>The only thing propping up the tech market right now is the fact that Apple, Microsoft and Google hold 23% of all U.S. corporate cash. Exit strategies pivot around whatever initiatives these three players choose, which means they, in essence, control the direction of tech innovation without having to acquire a single business. VCs will automatically organize their investments based on the acquisition habits of those three players in the hopes they get caught in the net as well.
So why isn't there an organization that distributes the risk of startup failure across many companies (kind of like how insurance distributes the risk of catastrophe)? That way, one unicorn would satisfy everyone, and all the startups that failed wouldn't matter. (I say this as someone who knows nothing about startups and VCs of course...)
8% return in equities market? Wow... I did not know what I can just invest money in the stock market and get rich...<p>The 8% annual return is impossible to achieve (BTW, that is number what sharks tell to "retail investors"). Between 1998 to 2008 the annualized return on SP 500 was about -1.35% (yes negative and there was huge boom during 2000s). And that is excluding all fees.<p>I think 8% would be an excellent return for limited partners who invest into VC funds...
If you read this before the article it may help: I always thought that VC meant "Venture Capitalist" or referred to the capital the investor invested (Venture Capital), this article doesn't mean either of those things, rather, it means the company that has accepted this money.