Venture Fund Performance – The Best Funds In The Ugly Years

Limited Partners who invest in venture funds always say that they want to back top quartile managers. Those are the funds that deliver the top 25pcnt of returns. It makes sense because the venture capital business is very much an asset class where past successes are a strong indicator of future successes. I am not going to go into why that is in this post, but if you are curious, leave me a comment and I’ll take that subject up in a future post.

One of the striking things about looking at venture fund performance data for the years 1999-2003 (the ugly years) is how poorly the top quartile has performed. [apologies - I inserted the wrong chart in here this morning as I was posting from my blackberry. I have now corrected it.]

Upper_quartile_ratios_9903

The top quartile as a group is not close to distributing the paid in capital for 1999 and 2000 (funds that are 7-8 yrs old now). And the total value over paid in capital for the entire period hovers around 1X.

That means that if you had followed conventional wisdom and if you were able to get access to the top funds, you’d be looking at a ‘get your money back’ scenario.

This is the reason venture as an asset class has been under question as of late. This is not sustainable performance. It cannot continue.

We raised our first Union Square Ventures fund in 2004, the beginning of the up cycle. And I am happy to say our early returns are promising. We have to keep delivering though. Not the 5x TVPI of the late 90s. But certainly 2-3x which is what the top quartile has delivered over the period of time I’ve been looking at. I am confident we can do it and I am equally confident that there are plenty of others in the venture business who can as well.

It will be interesting to revisit these numbers in a year or two when the ugly years are finally realized and the post ugly year funds start showing their stuff.