The Rise And Fall Of The Venture Business

This is the third installment in my venture capital fund performance series that I am doing this week. Today I want to start looking at the ugly years (1999 to 2003). As I’ve done in past posts, I like to focus on the "realization ratios", the cash on cash returns, instead of the IRRs. IRRs are useful, but I get paid on gains and that’s what I always want to look at.

This chart shows distributions over paid in capital (DPI) and total value over paid in capital (TVPI) from the late 1960s to now. The data comes from Venture Economics. These numbers are called "pooled average" which means they take all the funds they have data for, pool them all together, and calculate one single number. This is an estimate of what you’d get if you invested in every fund that was raised in a particular vintage year.


You’ll note that DPI and TVPI are basically identical until the mid 90s. That’s because funds raised before the mid 90s are pretty much fully distributed now. The gap between TVPI and DPI is the value of the unrealized investments.

This chart is dramatic. The venture capital business was a great investment from the mid 80s through the mid 90s. You could get 2.5x to 5x on your money if you bought the entire industry.

But by the end of the 90s, starting with the awful 1999 vintage, the business has not been an attractive place to put money.

Frankly I am surprised that the 2001, 2002, and 2003 vintage years aren’t showing better numbers. Those were years when you could buy quality companies at very attractive valuations and many of the companies that were funded in that period have since been liquidated at much higher prices. I don’t understand why that is not showing up in the data.

My expectation is that this chart will look at lot differently in three or four years and we’ll see a return to a money making business. But I doubt the numbers will get to where they were in the early/mid 90s.

Next up – I am going to dig a little deeper into the "ugly years", from 1999 to 2003, to see exactly what is going on in those vintage years.