How well are venture capital firms really performing?
You’d think they are doing fine, glancing at the official statistics released by the VC lobby group each quarter.
Venture firms have seen a five-year annual return of 2.7 percent, according to data compiled through March 31, 2007 (see table below). That’s not great, but the VC business is a long-term one. Firms investing for ten years are seeing 21 percent annual returns, on average, according to data published by the NVCA and Thomson Financial. Long term, VC performs better than popular market indexes like the Nasdaq or S&P. Those benchmarks show returns of only 7.1 and 6.5 percent, respectively, over the same ten years.
The VC data deceives somewhat, however, because it captures “average” returns. The better performing venture firms distort the data, pushing up the average. In reality, the vast majority of venture firms aren’t doing that well, something Dan Primack documents using data from funds raised post-bubble. The median firm is losing money. There’s also the continued problem of self-selection. A venture capital firm on the rocks is bound to stop providing data in this voluntary system, and so won’t show up in the data.
Also, look at the divergent fortunes of “seed stage VCs” and “early stage VCs.” Seed stage VC investors made a meager 0.8 percent annually over ten years. That compares to 40 percent for early stage VCs. However, when we asked representatives at both the NVCA and Thomson about this strange discrepancy, they dismissed the 0.8 number, saying it was based on a small sample size and shouldn’t be trusted. They don’t usually publish the “seed stage VC” number, but “it found its way to the table this quarter.”
Speaking of which, we’re tracking two more data related stories next week. One will look at the Thomson/NVCA data about how much money VCs are investing in companies, to be released on Tuesday. This comes after they failed last week to meet their deadline on releasing the quarterly data. Thomson and NVCA blame a server failure. This second data story is about Glam, the controversial women’s network that says its the fastest growing on the Web. See audio file below for preview of these stories.