Myth 4: VCs Generate Spectacular Returns
Last year my colleagues at the Kauffman Foundation and I published a widely
read report, “We Have Met the Enemy…and He Is Us,” about the venture
capital industry and its returns. We found that the overall performance of
the industry is poor. VC funds haven’t significantly outperformed the
public markets since the late 1990s, and since 1997 less cash has been
returned to VC investors than they have invested. A tiny group of
top-performing firms do generate great “venture rates of return”: at least
twice the capital invested, net of fees. We don’t know definitively which
firms are in that group, because performance data are not generally
available and are not consistently reported. The average fund, however,
breaks even or loses money.
We analyzed the Kauffman Foundation’s experience investing in nearly 100 VC
funds over 20 years. We found that only 20 of our funds outperformed the
markets by the 3% to 5% annually that we expect to compensate us for the
fees and illiquidity we incur by investing in private rather than public
equity. Even worse, 62 of our 100 funds failed to beat the returns
available from a small-cap public index.
Venture capital investments are generally perceived as high-risk and
high-reward. The data in our report reveal that although investors in VC
take on high fees, illiquidity, and risk, they rarely reap the reward of
high returns. Entrepreneurs who are distressed when VCs decline to fund
their ventures need only review the performance data to see that VCs as a
group have no Midas touch for investing.
Like IH, investors may commit to high risk and likely financial loss
motivated by other factors than the profit motive, They may want to fund a
project that will advance the state of the human condition. Such funding is
more like a charitable donation. Such charitable funding is not associated
with the concept of fraud.
On Thu, Aug 31, 2017 at 3:42 PM, Jed Rothwell <jedrothw...@gmail.com> wrote:
> Rossi's imaginary company, J.M. Products, has folded its imaginary tent
> and vanished in the night:
> I have heard that Rossi is planning to go to Sweden to swindle his next
> group of marks.
> - Jed