Transparency (Continued)

The Wall Street Journal has a front page story today on the venture capital industry’s efforts to keep its performance confidential. Leading funds like Sequoia, Kleiner Perkins, and Charles River are declining to accept investments from public institutions that are required to release fund performance information in freedom of information act (FOIA) requests.

I don’t get it.

I realize that Sequoia, KP, and Charles River have put up good enough numbers over the years that they can set the terms of investment in their funds and decide who they want and who they don’t. I am not criticizing them for their decision.

But I do think this is much ado about nothing. The fear, as expressed in the Journal article, is that “interim results are likely to look bad because of the funds fees, the quick failure of some startups, and the immaturity of others”. This would lead “institutions to nit-pick every decision” making it “hard to invest for the long term”.

That’s crap and everyone knows it.

The data on the long-term performance of VC funds is out there. There is over 20 years of data available. It shows very clearly that the early returns are almost always negative. It also shows that the long-term numbers are very good. The same Journal article says that the University of California’s venture fund portfolio produced annual returns of 41% over the ten year period from 1993 to 2003.

The venture business is subject to early losses and long term gains. This pattern is known as J-curve and its well documented. The VC business also is subject to cyclicality. Some “vintage years” are much better than others. The 1996 vintage may be the best ever. The 1999 and 2000 vintages may be very bad (although Google could change that for some LPs).

And these facts aren’t lost on the general public. The Journal had a piece on Google a week and half ago where it said that the 1999 KP fund was down 31% per annum as of year end 2003 but that its investment in Google would return that fund something like 6x. The venture business is a volatile roller coaster ride. That’s not a surprise to anyone.

So I come out on the side of transparency. The industry’s efforts to keep performance a “trade secret” make us look like we’ve got something to hide. We don’t. We’ve got something to brag about.