How To Write A Misleading Headline

I know I don't have to explain this to anyone because it's done all the time, and I've done it plenty myself. But this headline from Claire Cain Miller's post on the NY Times blog yesterday is a good example of accentuating the negative in the headline:

Venture Capital Returns Dip Below Zero

Here's the facts from a VentureBeat story on the same data:


So let's look at this data. Venture returns across all funds and stages are 6.6% for a three year period, 8.6% for a 5 yr period, 17.3% for a 10 yr period, and 17.1% for a 20 yr period. Venture as an asset class has outperformed the public markets by 7.7% over a three yr period, 5.5% over a 5 yr period, 15.2% over a 10 yr period, and 8.4% over a 20 yr period.

And the headline that comes out of that data is that "venture capital returns dip below zero"?

The thing that really bugs me is if not for FAS157, which I posted about a few weeks back, we wouldn't even see negative returns for VC in the past year. FAS157 is an accounting ruling which requires venture capital firms to mark their investments up in good markets and mark their investments down in bad markets. I am not sure if this was an intended consequence or not, but FAS157 is going to make venture returns more highly correlated with public market returns than they have been in the past.

I'm quite sure that the -1.6% one year return for the venture asset class is driven by the roughly -33% drop in the NASDAQ from september 2007 to september 2008. Many venture firms, including ours, use NASDAQ traded companies as the comps in our FAS157 valuations.

But talking about one year venture returns is like talking about the score in one inning of a baseball game. Venture capital is a long term asset class. I recieved a distribution last week from a fund that I helped raise in 1994, fifteen years ago. Returns develop over a long time horizon in venture capital and focusing on what happened in the past year is not useful.

I'll end this rant/post by saying that the venture business does have issues. It has not produced the kinds of returns this decade that it is known for and is expected to produce. Generating a 8.6% return over the past five years is nothing to brag about. But venture has outperformed the public markets over any time frame you want to talk about and I think it will continue to do so. And the venture business is going through its own restructuring, forced by dwindling returns and financial stress in the limited partner base. There will be fewer firms, less capital, and less competition and overfunding in the next ten years than there was in the past twenty years. So I think its a very good time to be investing in venture capital right now if you can put money with a good manager. But that doesn't make a good headline, particularly in these times.

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