VCs are doing fine, only if they've been investing for 10 or 20 years

We’ve written plenty about the hardships of venture capital firms lately. Many are quietly dissolving, finding it difficult to make money in an era of huge supply of capital.

While the latest data suggests venture firms have done fine over the last year, buoyed by the stock market’s performance, only firms investing for a decade or longer are producing profits much better than the market benchmark of the S&P 500.

The latest data shows the annual returns for periods ending June 30, 2007, published by Thomson Financial and the National Venture Capital Association.

In the table below, you’ll see that returns over the last five year period have been very poor for venture capitalists. They may as well have invested their money into the public markets. While one-year and three-year returns are about the same as the public market performance, this isn’t very good because VCs take on much more risk when they invest.

Keep in mind a few other factors too. These statistics may be biased upward, because venture capital firms that go out of business don’t tend to furnish their results to the NVCA (therefore, their negative numbers aren’t included in the averages, leaving the resulting data rosier than they are in reality). Also, going back 10 and 20 years includes the fabulous, some would say exceptional returns of the late 1990s. You could argue the venture industry will never see such profitable years again: Everyone else in the world has discovered how this industry works, meaning the early VC birds will no longer have all the fat worms to themselves.

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