So far, not much success. In fact, none.
I am not giving up though. I’ll get clicks at some point. I may have to change my ad and copy. It’s not particularly compelling.
But what’s interesting to me is that there’s a better way to get fans on your business’ page on Facebook. Get someone with the right audience to link to it. Then it will spread virally through the news feed on Facebook as people join. Here’s our stats for the past couple days since I did that.
Many of the comments to this series of posts I’ve been doing on Venture Fund Performance have been trying to calculate IRRs from the cash on cash multiples I’ve been posting. That’s pretty much impossible because you don’t know the timing of the cash flows. The IRR data is as prevalent as the cash on cash multiple data, but I prefer looking at cash on cash because that’s how we get paid in the venture capital business and because I think it’s a better determinant of how well a fund performs. IRRs are driven largely by the timing of cash flows. An early big hit will impact IRRs for years to come, but since you can’t just turn around and put the money back in a 35% instrument, it’s not as valuable as a fund that delivers 3-4x on your money.
OK. Enough on why I prefer cash on cash multiples. Here are some IRR numbers for the median venture capital fund from 1981 to 2003. I found a new source of venture capital performance yesterday. A friend sent me some data from a firm called Private Equity Intelligence (PEI). I am not entirely clear how they get their data, but it appears to voluntarily reported by the fund managers. In a previous post, I looked at sample sizes and noted how Venture Economics sample sizes have gone down precipitously in recent years. The PEI sample sizes in recent years are about the same as the Cambridge Associates sample sizes. So I included PEI data along with Cambridge data for this post.
These are "average" fund IRRs from 1981 to 2003 calculated two ways; media and equal weighted by fund size.
As with every chart I’ve published on fund performance, the first thing you notice is the huge run up in returns in the mid 90s (the golden years). I prefer to look at the numbers from 1981 to 1990. For some reason during this period the average venture fund IRR went from 10% to 20%. We saw the same trend in an earlier post where we looked at cash on cash returns. During that period, cash on cash returns went from 1.5x to 2.5x. So one thing we can ascertain from this data is for a typical fund cash flow, 1.5x translates into 10% net IRR to LPs and 2.5x translates into 20% net IRR to LPs.
We’ve spent time recently looking at the ugly years from 1999 to 2003 and this slide shows that the average fund is still producing negative IRRs for the 1999 and 2000 vintages. That was obvious from the cash on cash returns as well. It’s too early to make any definitive statement on the ultimate IRRs that will be delivered by 2002 and 2003 funds and I personally think they’ll do OK.
I calculated average IRRs for this entire date range for each of these four data sets. They were:
Cambridge Median – 12.66%
PEI Median – 11.48%
Cambridge Equal Weighted – 23.72%
PEI Equal Weighted – 17.30%
It’s been said that the average venture fund over the past 20 years hasn’t performed any better than public equities. It sure looks like that’s a true statement. If you take the ugly years out of that calculation, then the numbers are roughly 5% better across the board and then you are approaching a proper risk adjusted return for the asset class.
My last thought on this topic is that venture capital is a manager selection problem. If you’d been in the top quartile over the entire period, including the ugly years, the average Net to LPs IRR is about 25%, about twice the median return. If you are going to invest in venture, you’d better be with the top managers or you’d be better off in public equities.
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.]
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.
I got a preview of a cool new feature that will be in the next release of Voki, a consumer avatar service developed by our portfolio company Oddcast. Voki will let you link your Voki scene to other services. I linked my avatar to twitter and now my avatar’s speaks my most recent twitter message.
You can see how it works by clicking on the play button. I can think of all kinds of services that could be linked. Very nice work Voki team.
I’ve been struggling how to deal with maintaining two blogs (well four really) along with twitter, flickr, delicious, and facebook.
I blog at avc.blogs.com (you are here), fredwilson.vc, newcritics.com, and unionsquareventures.com.
I regularly create new content at twitter, flickr, delicious, and facebook.
Initially I planned to use fredwilson.vc to aggregate all of that activity in one place. Tumblr (the service that hosts fredwilson.vc) is great for doing that. Our firm, Union Square Ventures, has an investment in Tumblr and I suppose I am biased because of that. But to be honest, I’ve tried a number of "life stream" services and Tumblr is by far my favorite.
But I’ve come to realize that Tumblr is also a great blogging service as well as a life streaming service. And it’s particularly good for "light blogging" or "micro blogging". The Tumblr bookmarklet makes adding quotes to my tumblog a snap. The photoblogging capabilities are very slick. And the music blogging feature is really great too.
So here’s what is going on at fredwilson.vc:
I am aggregating all the posts I do here at avc and the posts I do at newcritics and Union Square Ventures into Tumblr, but they come in as truncated with a link so that they don’t overwhelm the tumblog format. I also bring in all my twitters and delicious posts. Occasionally I’ll send a flickr photo to tumbr as well.
But each and every day, I try to add one photo that’s a reflection of what I am doing, one quote I find memorable on the web, and one song to my tumblog. That stuff will only go to tumblr and it will stay there.
I suspect that for most of you, what you get here at avc is what you are most interested in and this will be a better place to "follow me". But for some, like my mom and dad, maybe the rest of my family, and certainly my friends who are on tumblr, fredwilson.vc will be better.
One of my favorite records of the moment is The Magic Position from Patrick Wolf. I’ve gone back and checked out his earlier work and while its very good, this record which came out in February, is spectacular.
It’s indie pop music, in the vein of Of Montreal or New Pornographers.
Patrick is young and incredibly talented. Apparently his shows are visual experiences in the style of The Flaming Lips and Of Montreal. I haven’t seen him live, but the photos on flickr are certainly entertaining.
Here are a couple tracks for you.
The Magic Position – Patrick Wolf – The Magic Position
Get Lost – Patrick Wolf – The Magic Position
And here’s the Patrick Wolf page on HypeM if you are in the mood to sample some more.
Thanks to everyone who commented and emailed me after my post yesterday afternoon. I am indeed dense. The social advertising system on Facebook is up and running, I just couldn’t find it.
Here is my ad. It took me all of a minute or two to create it. I am targeting it at facebook users who have an interest in technology. If you click on the ad, you go to the Union Square Ventures facebook page. I am paying $0.10 for each click and have a cap of $10/day. That is similar to the rates I pay on Google adwords for my avc blog ads.
Just to be clear, I don’t really see the value in running Facebook ads for the Union Square Ventures page on Facebook or Google ads for my blog. But I don’t understand technology by reading about it. I understand technology by using it.
Facebook says that there are 17,291,140 people who will see ads on Facebook. The only targeting they apply to get that number is 18 years and older. That’s an interesting number in its own right.
When you add targeting, the number of people you’ll reach goes down. I added the keyword technology to my campaign and the size of the audience I can reach dropped to 32,140 people. That’s way less than the number of unique visitors that this blog sees every month.
I wonder how the keywords are mapped to pages. I just added the word technology to my personal interests in my profile to see if that would target my ad to me. It did not.
You can also use a Facebook ad to send traffic to pages outside of Facebook. I am going to set up an identical ad to see how that performs versus driving traffic to Facebook pages.
I think this advertising system on Facebook has great promise. It would be even better if there is an API into the system so that third party advertising systems (like Clickable) could be used to purchase and target Facebook ads. It would also be interesting if I could run Facebook ads on my blog like I run adsense. I suspect all of that is coming if it isn’t here already.
I am eager to get my hands on this new advertising system that Facebook announced. I set up a business page today and am ready to go.
Forrester says it’s going to work like this:
1) Facebook Pages: Brands get their own profile
For the first time, businesses will legitimately be able to
setup profile pages, much like MySpace’s business profiles feature.
Next, Facebook members will add these brands as ‘fans’ (much like
friends) and this will produce a connection between the parties.
Members will self-identify with brands in what we are calling
“Fan-Sumers”. Furthermore, this service, called “Beacon” gives third
parties the ability to share information on the newsfeed and provides
lots of unique opportunities. Sponsored groups will start to evolve
into this new form brand profile as this system gets adopted.2) SocialAds: Endorsements at the friend level lead to eCommerce
Once a member has indicated they are a fan of a brand, that
brand can choose to purchase SocialAds (from Facebook Sales or via a
self-service platform). A unique endorsement of a product or brand will
now appear on that individuals news feed or banner or skyscraper ads.
Advertisers can purchase social ads target by profile demographics and
profiles, as well as by activities done in Facebook. Payment is an
auction-based system available to marketers via both CPM and CPC
pricing.3) Use “Insight” for control and flexibility
This self-service dashboard called Insight gives the marketer
detailed knowledge how their advertising campaign is working on
Facebook. It’s expected that advertisers will have flexibility, control
over the type of ads they deploy, in what quantity, and the
demographics they want to target.
Maybe I am dense, but I can’t find Beacon, SocialAds, or Insight. Are these all vapor right now? If so, when are they going to be released?
I set up the Union Square Ventures page on Facebook this morning. It wasn’t much different than setting up a regular profile. I wasn’t offered an opportunity to market our services to Facebook’s user base which I would have thought was the whole point of allowing commercial entities the opportunity to set up shop on Facebook. Maybe I missed it.
Anyway, I think this is a good move for them. We now have another marketing channel for our business. It needs dressing up and we’ll do that over time. But I think this can be good for us and I know it’s good for Facebook.
The years from 1999 to 2003 are the "ugly years" in my book. The venture industry raised unprecedented amounts in 1999 and 2000 and proceeded to mess up the business. Competition for deals was intense. Dozens of copycat companies were funded in every niche imaginable. Seed rounds were $10mm and the $100mm venture round was normal. It was nuts. I participated in the nuttiness and paid for it like everyone else.
The result was that by mid 2001 it was nearly impossible to raise a new venture fund unless there was a V or an X behind the fund’s name. And it was equally impossible to raise a round of financing for venture backed companies.
The rounds that did get done were at very low valuations and were often cramdowns or recaps of existing portfolio companies. I believe that the deals done in the ’01/’02/’03 vintage years will ultimately produce excellent returns, but it’s hard to see that because many of those deals were done in funds of the ’99 and ’00 vintages that were so far under water that the excellent performance of the ’01/’02/’03 deals will largely go to getting LPs their money back (a good thing for everyone).
Here is some data on the performance of these vintage year funds. As I stated in my previous post, I believe the Cambridge data is better for the post bubble years.
The Cambridge data does show gradually improving returns in 2002 and 2003. These are "pooled average" numbers and net to the LPs (after fees and carry). So this is a proxy for the entire industry.
The numbers aren’t great to be honest. Generating 1.2x on an invested capital after four years isn’t much to write home about. But there are some interesting things going on during this time period that I am going to dig deeper in the next posts I do.
