What Is A Good Venture Return?

Lawrence Aragon at PE Hub used the news that Cisco paid $590mm (in stock) for Pure Digital the maker of the super popular Flip Cam to ask this question.

it sounds like a pretty good deal, but you have to understand that the
VCs put $95 million into Pure, which makes the Flip digital video
camera. Assuming they own half of the company, that’s a return of just
over 3x their money. For a middle-of-the road VC firm, that would be a
decent return, but for big name backers Benchmark Capital and Sequoia
Captial that’s pretty much a dud.

It's a good question and worthy of a discussion. That's what blogs are for, so let's have it.

My friend Mike Feinstein points out in the comments to Lawrence's post that the VCs probably made well over 3x on their money:

I’ve got no knowledge of the specifics of this deal, but once $95M is
into a deal, you can be pretty sure that the VC’s own 70-80% of the
company. So, the VC’s probably took at least $440M of the exit value.
It’s still about a 4.5x, so your sentiment may be right in the
aggregate. But, the early investors may have done better than that
because they probably had a lower average share price than the later
stage investors.

So let's move away from the Pure Digital story. Anytime you turn $95mm into ~$450mm in the span of three or four years, I'd say that was a good return.

But is 3x a good venture return? It depends entirely on the stage you invest in and your "batting average".

Most people know that "batting average" is the percent of times you get on base (based on the number of times at bat). In VC parlance, the batting average is the number of times you make a successful investment divided by the total number of investments you make.

Let's call a "successful investment" one that you get at least your money back. That's not really accurate, but let's do it anyway.

If you are a late stage investor, like IVP or TCV (two of the better known Silicon Valley late stage firms), then your batting average is very close to 100%. You wait until the early stage risk (technology, team, market) is wrung out of a deal and you invest on a set of price and terms that almost insures you'll get your money back and you attempt to make three to five times your investment if everything works out right. Since there are very few total losses in the portfolio, a 3x on average would be a good return for someone with a 100% batting average.

If you can return 3x on your portfolio before management fees and carry, you can deliver 2.25-2.5x net to your investors and over a ten year period (with an average investment duration of 5 years), that is an acceptable return to the LPs (18-20% IRR).

However, if you are an early stage investor (like our firm Union Square Ventures), then it is a different story. I've said many times on this blog that our target batting average is "1/3, 1/3, 1/3" which means that we expect to lose our entire investment on 1/3 of our investments, we expect to get our money back (or maybe make a small return) on 1/3 of our investments, and we expect to generate the bulk of our returns on 1/3 of our investments.

If you do the math with that batting average, and assume the return is 1.5x on the middle third, then you need to average 7.5x on the 1/3 of the investments that make the bulk of the returns.

So does that mean that early stage investors who get a 4-5x on a "good deal" are not going to deliver for their LPs? Not exactly. It depends on how you think about that portfolio of "winners" (the 1/3 that produces the bulk of the returns). I've also said on this blog a bunch of times that we look for one investment to return the entire fund. In the case of our 2004 fund, that would be a $125mm return on one single investment.

If we have $10mm in that investment that returns $125mm, that is a 12.5x on our best deal. So if you need to average 7.5x on the portfolio of winners, you can certainly have some 4-5x deals in that basket as well.

The way I like to think about this is one deal returns the fund, another 3-4 deals returns it again, and the rest return it a third time to get to the 3x gross that a fund must hit to deliver good returns to the LPs.

Going back to the Pure Digital deal to wrap this up, if Sequoia and Benchmark are investing funds of roughly half a billion, and they each took out roughly $100mm in this deal, then Pure Digital is most certainly in the winner category that will produce the bulk of returns for the fund. It's not the deal that will return the fund outright, but its in the next category. It's an investment that worked out well for the investors and I am sure they are quite happy they made the investment and with the returns.

#VC & Technology

Comments (Archived):

  1. Dan Lewis

    >>> Most people know that “batting average” is the percent of times you get on base (based on the number of times at bat).Sorry for being a baseball nerd here, but, that’s not really right :-/

    1. fredwilson

      You have to take out walks and errors, right?

      1. Dan Lewis

        BA = H/AB. Hits (H) are just singles, doubles, triples, and homers; walks never enter the equation. At bats (AB) include all times at the plate except for walks, times hit by pitch, sacrifice flies, and sacrifice bunts, and a few exceptionally rare things that have no name (e.g. when a player hurts himself mid at-bat and doesn’t complete the at-bat, but even then, not in all cases), and I think I’m forgetting something, nerd credentials be damned.It’s more than just walks and errors. If you ground into a fielder’s choice, you end up on base, but your batting average raises. And there are flukey things all the time, like when you reach on an error on a sacrifice bunt attempt, end up on base, and your batting average is supposed to be wholly unaffected, depending on where the error occurred. (The same logic does not apply to sacrifice flies, nor should it, and that’s recognized by the formula for On Base Percentage.)But basically:* You can end up on base and have your batting average go down.* You can end up not on base and have your batting average go up (but that’s really hard to do and typically involves a base running mistake, which by analogy would be like failing to sell a company for 3x because you believed you could get 5x, only to see it go under).

        1. fredwilson

          Thanks for clarifying that.

        2. Scott

          Great elaboration of the analogy.

  2. Camilo

    I also think that it is important to consider the timing of the deal and the current market conditions that are limiting exit options for VCs right now. I think the deal was a winner for all parties. Cisco gets a great company, its technology and people for a fair value while not paying extreme premiums as seen on boom years.I also assume Jonathan and the rest of the founders are very happy with the ways things worked for the company and the investors. As Fred Said, the VC’s are also happy with the investment.I am wondering if the company could have survived for another year or two with the state of the economy and lower expending from consumers?

  3. jakemintz

    I wonder what the actual return for the late stage investors was. Considering that PDT was founded in September of 2001 and that they dramatically changed strategy several times before generating significant revenue, unless the entrepreneurs were excellent terms negotiators they very easily could have not owned much of the company. If you assume 7-8% dividends over 8 years on convertible preferred stock plus some level of liquidation protection and 1x+ participating, then the early stage investors probably did very well. Hopefully the founders still had a decent amount of equity by the time the acquisition took place.

    1. Dan Primack

      Just to try helping out a tiny bit: According to a 2006 quarterly from Crescendo Ventures (one of Pure Digital’s original backers): Crescendo had a 9.47% ownership stake at around a $7m cost. This was, however, before the company raised another $40m or so.

      1. fredwilson

        Hi Dan ­ thanks for stopping by and sharing that infoLet’s assume that last $40mm bought 15-20% and that Crescendo didn’tparticipate (wild ass guesses)They’d have been diluted down to say 8%And so they’d have received $48mm on their $7mm investment, about 7xThat’s a damn good return

        1. Dan Primack

          but of course. And now let me fix it: Seems Crescendo came in on the Series C (although lots of money did still follow that), rather than the series a. seems our database doesn’t include the a and b for some reason, which means pure digital actually raised more than $95m.after the c, pure digital also raised a d, e and f (over $80m total). seems crescendo did do pro rata on at least some of those.to me, any positive multiple return is this environment is a homerun

          1. fredwilson

            C’mon Dan, it’s not that badI think we have quite a few companies in our portfolio that we could sellnow for a very nice returnIt feels to me that there’s too much gloom and doom surrounding VC and thatwe’ve been through much worse earlier this decade

          2. Dan Primack

            you’re right. hyperbole got the best of me.

          3. deancollins

            But will you make money off them if you dont sell them?One of the reasons i’m staying out of the angel rounds for my current project is so that it doesn’t have to be sold because someones agenda is to get their money back.(lol – that may change depending on how much ‘marketing’ budget needs to be thrown at it to be self sustaining) but you get my point.My question was why would Cisco buy Flip.And…How much money did Flip make from camera sales and was this a viable strategy to continue or were the camera sales a ‘loss leader’ to being bought out.Cheers,Dean Collinshttp://www.Cognation.net

          4. fredwilson

            I am confident we will eventually make money on our best investments. I havelearned to be patient. Some of my very best returns in this business havetaken 10 years or more to be realized. There’s a saying in the venturebusiness, “lemons ripen early, pearls take longer”

  4. Dan Lewis

    As an early-stage investor, what do you aim for? I understand the three buckets of 0, 1.5x, 7.5x, but in general, that’s retrospective. When forward-looking, how do you do the analysis?Let’s say you see a potential deal and conclude that it’s most likely to give returns in the 2x-3x range (say, 66.6%), somewhat likely to bust (say 33.3%) and has a slight but non-zero chance of being that 10x home run (.1%). Assuming that the amount of investment being sought is average for your investments, is this a pass because of the low upside? Note that the expected value of this deal is a bit north of 1.5x (2.5x*.66 = 1.75x), but there’s less volatility. Is that a positive or a negative?The reason I ask is because of what you said when comparing USV to IVP — you can’t just look at the deal as part of the portfolio, but also as part of the overall strategy and, obviously yet often overlooked, as the deal itself. If your expected return going in is 1.75x, and you structure the rest of your portfolio to factor in that expectation, a return of 3x is a monster win. On the other hand, if you have too many of those deals in your portfolio, the other ones need to have a much higher expected return, and a 3x return would be not good enough.

    1. fredwilson

      Good question and you are on to the right approach, which is expectedreturns analysisI’d say if you can’t get to an expected return of at least 3x, it’s notworth it

      1. Dan Lewis

        Is that also true for late-stage investments?

        1. fredwilson

          i think so because the expected loss percentage is a lot lowerthe expected returns analysis takes all of that into accounti think many VCs shoot for a higher expected return (say 5x) because they implicity distrust their ability to predict the outcomes correctly

  5. deancollins

    Do you have any comments on the $590 million dollars valuation?These guys only sold 2 million cameras and they are worth $590m? That valuation is higher than the entire revenue (average rrp $149 per camera) that the company has made in it’s entire lifetime?I dont get it what am i missing here? yes i know all about Cisco and Scientific Atlanta set top boxes etc There must be something else to this deal (maybe some IP) that the press isn’t being told about.Cheers,Dean Collinswww.Cognation.net

    1. fredwilson

      I don’t have any data on their current fiscal year numbers so I can’t addanything that’s not a total guessSorry about that

    2. fbourdeau

      Good questions Dean. What they do with the next 6 months to a year will be interesting.Francois

    3. vadadean

      In his WSJ blog, Ben Worthen expressed a keen insight about the valuation:http://blogs.wsj.com/digits…———————-One other point of the Pure Digital acquisition that hints at Cisco’s broader ambitions: Jonathan Kaplan, Pure Digital’s CEO, will become the general manager of Cisco’s consumer division. Hooper said that one of the reasons Cisco was willing to pay so much for Pure Digital is because the company demonstrated with the Flip camcorder that it can recognize the need for a product and time it well–in this case introducing a cheap, small video camera just as sites like YouTube were exploding. This fits well with the focus on “market transitions” that Cisco execs talk about incessantly.Kaplan strikes some people as a visionary who can help Cisco compete with Apple–not only with product timing but by making them easy to use and great looking. “He has the merchant’s touch and the designer’s aesthetic which is a very rare combination,” says Michael Moritz, a venture capitalist at Sequoia Capital and an early investor in Pure Digital. He adds that Cisco bought a “team of gifted people capable of designing spectacular consumer products.”Sounds like the sort of people one would need to in order to take on Apple.———————-

      1. fredwilson

        Paying a premium for the team can work out brilliantly but only if they dowhat is necessary to retain the team.It is so hard to keep an entrepreneur happy inside a big companySeveral years ago, Cisco bought Ironport, an email hardware company that hasa very large footprint in the enterpriseI suspect that acquisition has worked out very well for CiscoThat company was led by a fantastic entrepreneur, Scott Weiss, who I havecome to know pretty wellScott stayed for a couple years, but is now on his way outSo it will be important to see if Cisco can retain Jonathan and his team forlonger than a couple years

  6. andyswan

    Same as investing/trading…..and entrepreneurship.Lots of guys get VERY rich batting .200. Others do quite well batting .650I think it’s absolutely critical for investors in anything (trading, private, public, themselves) to make sure their “style” (batting avg vs homeruns) is in line with their underlying personality.

  7. Chris Dodge

    I think you might want to consider the baseball statistic “slugging percentage”, which is the total bases divided by number of at-bats (an AB does not count walks or base-on-errors). http://en.wikipedia.org/wik…. E.g. a valuable slugger can have a low batting average, but he’s always hitting for extra bases/home runs, like Frank Thomas in 2003 (42HR @ .260 BA)That would factor in low-percentage of any successful outcome, but properly weighing in the “big deals” appropriately.Now we’re all getting all “cybermetic”…

    1. fredwilson

      Great suggestion!

    2. andyswan

      Right on! A great look at why Babe Ruth is still the greatest player to have ever played the game:THE STAT: http://www.nocryinginbaseba

      1. kidmercury

        please. the babe lived before the era of the modern super athlete, a golden age when you could be completely out of shape and still dominate. i’d like to see him go up against roger clemens or greg maddux in their prime. i’ll take barry bonds any day of the week and twice on sunday over the babe.

        1. andyswan

          The ONLY fair comparison is vs your contemporaries.Not sure the 30s had the “stuff” Barry needed to be great.

          1. fredwilson

            Oh snap

          2. kidmercury


          3. jaredran

            Couldn’t help but notice on the slugging % ranking, Lou Gehrig was #3 and he spent his entire career hitting behind The Babe. If Gehrig had seen half as many good pitches as The Babe did with Gehrig’s protection his slg. % might’ve been over .700. Gehrig got a whole lot of return on a difficult situation–imagine bubble-type returns during a recession. (like how I completed the metaphorical circle there?)

        2. fredwilson

          The thing about this community that never ceases to amaze me is how adiscussion on venture returns morphs into babe vs bonds. Well done guys!

    3. Scott Johnson

      Seems to me fund size should be factored in here. Exits are scarce, valuations on exit are depressed, and if you have $2 billion under management across a 3 funds (fairly common situation), it takes a pretty vivid imagination to see how one might merely return capital on those funds, much less get to 3x.For example, assuming 20% ownership at exit on average and 25% carry, $2 billion in funds under management assumes $10 BILLION in exit value to break even, $23 BILLION to get a 2X and $37 BILLION for a 3X. For that firm alone…and there, what, about 40 of them! Where is that coming from?A team that needs 20 runs per game to win is structured for failure from the beginning.

      1. fredwilson

        There’s a reason why we manage funds of 125mm and 150mm

  8. leeschneider

    Thanks for the insight Fred. I found it very interesting to see how you’re breaking your USV expected returns into 3 buckets. In the Investment Management world, our firm (long only, US only, nothing exotic) takes the approach that all of portfolio holdings should be successful. Of course, there are always duds in the portfolio, but I feel pretty certain that we would never expect 1/3 of them to fail. Really interesting to see the risk tolerance difference between VC and IM.

  9. Pierre V.

    Clearly you have to adapt your expectations to your stage of investment (early vs. late stage) but also to your market. I know you guys are mostly US based, but here in Europe, you can’t make it work with a low batting average (I learnt something today!), high multiples of exit being quite rare.

  10. Philip Baddeley

    Great post and comments. Could you do a post (or expand these comments) on angel investors in technology start-ups of the kind we see in the Cambridge Cluster, UK? It seems that angels can expect a higher loss than 1/3, probably 1/2 and with the added risk of washout rounds. Also comment on how entrepreneurs/founders can best manage the many angels, or is that only found in high technology clusters?

    1. fredwilson

      Angels will have to make money on fewer wins with bigger multiplesRon Conway is famous for losing money on every investment he made as anangel in the late 90s except one, GoogleThe return on his entire portfolio was quite good

  11. Harry DeMott

    I’m always interested and a bit amused by all of the commentary trying to bucketize investments into different categories when looking at VC, PE, Hedge Funds, etc…. All investing is really the same – and it is just a question of risk and reward that you are dealing with. Fred and USV are “early stage” investors – which simply means that he is taking a ton of risks based on an idea and a management team (and probably more management team than idea) and therefore since more can go wrong, the returns have to be greater – simple as that. As you get later and later stage – or get to publicly traded equities the risks decline – and so does your expected return. Probably the most important thing in understanding various investment managers is to understand their risk tolerances and the variability of returns in their portfolios. For example, if Sequoia did Google and YouTube and made 10X on their fund, but had 98 other investments that were goose eggs – the returns are phenomenal – but not necessarily repeatable (or maybe in Sequoia’s case they are). If another investor returns 3X on their fund, but they have a 50% hit ratio (money back or more), then that is likely to be more repeatable. If you were an investor, which would you rather have? The glib answer is the 10X return, but a priori – and not getting into the wow factor of investing with Sequoia, most professionals would take the latter. Without fail, investors put money with guys like Fred or Benchmark because they expect to get their money back and beyond that, they expect to get a return on that money that is uncorrelated to – and hopefully higher than – other public securities they could be investing in without much frictional cost or any liquidity issues. What I always find amazing is just how correlated VC returns are to the public markets in general. Think about VC exits – there’s IPO’s and there’s sales to strategics. IPO’s are 100% correlated to the market (any tech IPO’s in the last 2 years?) and strategic sales often depend on the currency of the acquirer (i.e. CSCO’s stock price) or the alternative uses of CSCO’s capital (in this case a whole lot of pretty cheap companies to buy). So to get back to the very point of the original post, does the sale of the company to CSCO represent a good investment? Hell yes. The investors got their money back. They got an excellent return (and I don’t care what round you were in). They got an uncorrelated return (NASDAQ return for the last 7 years was what?) And they got all of this in a period of time when the IPO window was all but closed, and strategic buyers are essentially vulture investors. So to all involved – Bravo!

  12. Dave Broadwin

    You are looking at it from the point of view of whether the particular bet was good (or not) at the moment it was made. Makes sense to me if you are trying to judge investment acumen, but what if the money has been sitting around earning money market rates of return for a few years before the bet gets made? Say you made the bet in year three (or five) of a fund, how would you recalculate the “real” return to your LPs based on the fact that the money has been committed for three years before it is deployed? Or, am I asking the wrong question?

    1. fredwilson

      We don’t call the money until we invest itSo it doesn’t sit in a money market

      1. Dave Broadwin

        Yes, but doesn’t your LP have to keep its cash liquid to meet your potential call — that is in a money market equivalent investment. So, my question is still, shouldn’t the LP calculate the return from the time he ties up the money?

        1. fredwilson

          Most of our LPs are big institutions and they don’t operate that way. Theyhave models and they have hundreds of partnership investments. They keepvery little of their capital allocated to VC liquid.

  13. Chris Frost

    Fred, what is your view on investment size?Is there a different skillset required that keeps say Ycombinator out of the big stuff. Is is that a lack of ability or contacts to get the bigger money to invest in later stage investments that keeps them out of that market?Can you go as far as to say the likes of IVP or TCV have the money but not the wisdom. They execute, rather than understand real entrepreneurial opportunities.One would think that if you are a great investor with good contacts and reputation you would always want to invest a small amount early. You then get the chance to reinvest.In an ideal world would you and other VCs invest in all sizes of investment, i would think i would?

    1. Scott

      It’s tough for VC’s to invest across stages (unless they’re “paying to play”).That’s because they all invest in different types of risk.Seed investing is all about proving the concept and validation. It’s not about modeling cash flows, but rather knowing the markets and technology so intimately that you can strongly hypothesize.Series A is about proving the business.Later stages are about rapid growth and scaling to exit. Modeling becomes more important here because you have a lot of assumptions that can be honed in on.Early on in a company’s life, it’s hard to know how long an implementation will take or how viral a product will be since things are in prototypes/beta.Different VC’s are more focused in different areas and thus specialize to an extent.However, some larger funds will seed a company and “pay to play” by investing in each round (could be 4 or 5 times) until the company’s exit assuming it continues to succeed.

    2. fredwilson

      Different strokes for different folksIVP and TCV are smart investorsSo is Paul and his team at YCThey are just different

  14. Facebook User

    thanks for the straight talk.

  15. Steven Kane

    as someone who is very interested in this subject, thank you – again – for such simple honest lucid discussionas for the details, while i love the Flip products, $590MM seems like a very rich price for pure digital – a company with little prospects of generating substantive EBITDA trades at a high multiple of revenuesand even if investors invested $100MM and only owned 50% of company, thats a solid, or even great, return. if nothing else, that investment crushes any other asset class in the same time period, which IMHO, at the end of the day is the best measure

    1. fredwilson


  16. Chris Albinson

    Fred – I totally agree this was a great win, especially in the CE space. I am very impressed with the willingness of the team to stay with it after two failed go to market approaches. Most syndicates would have walked away much earlier. I don’t think we have seen a win like this in the CE space since Portal Player (chip in the iPod). Congrats to the team!

    1. fredwilson

      And we know who were investors in portal player :)))

  17. Scott

    Excellent stuff fred. Thanks for the infoHas usv peaked at a specific point, in terms of qauntity of deals?I would think, if you’re batting 300, the more investments you make, the better you get. Or, hit a slump.With the aparent success of y-combinator, I think qauntity is the futureYou’ll need to clone another you soon.Hopefully your son is into tech/finance…. Or, at least, baseball

    1. fredwilson

      We added a third partner, Albert, last yearHe was a venture partner with USV before thatSo we have capacity for another year or two depending on how many newinvestments we make and how many we exit

  18. Michael B. Aronson

    Fred- once again you get a great discussion going! This thread is going to be mandatory reading for my Wharton student interns. We like the baseball analogies as well for our portfolio returns (early stage out of PENN/Wharton) both for financial returns and qualitative analysis. Here is how we recently ranked our deals for our first fund which is 2005 vintage, the top of the list has “home run” (4x) in the dugout via a cash acquisition, a potential grand slam (10-12x) for 1x the entire fund which is listed as “rounding third” as well as a couple of other home runs, then 3x, 2x, 1x, etc. Note that we keep our med tech deals at between “first and second”, 1-2x until FDA approval and even into revenues. Our “flip video” like deal (consumer retails/ software and services) is listed as “heading to third” as thats our “fair value” carrying cost as the A round investors as we head into a C round or trade sale. These descriptions tie out to our FAS 157 valuations as well. We have gotten very good feedback on this from our LPs. Looking forward to seeing you at the Wharton Business Plan competition. As you can see , the portfolio does break out into thirds as you predict.Home RunHeading HomeHeading HomeHeading for ThirdRounding SecondOn the Way to SecondReached First SafelyReached First SafelyBall In PlayBall In PlayPicked Off FirstSent to Winter LeagueSent Back to MinorsStruck Out Swinging, Back At BatStruck Out Swinging

    1. fredwilson

      Are these all early stage investments Michael?

  19. Rob K

    My old firm, Austin Ventures (before they became a growth equity firm) always referred to venture capital as a slugging percentage game, not a batting average game. Slugging percentage is about how many bases you get per at bat, not how many times you reach base, so home runs and triples count more than singles. It’s a better analogy for early stage investors I think. So a massive return (10x) counts ten times as much as a 1x. Of course, LPs want to “look inside”your slugging percentage to see if you just got lucky on one deal, or with one partner.

    1. fredwilson

      Yup. That’s a great point. I don’t believe in luck. A win is a win. You made the bet.But I do believe in repeatability. That’s what LPs really need to look for

  20. Hazem A. M. Awad

    Thanks a lot for the great insight into the VC world Fred. Its always helpful for us entrepreneurs to understand the VC point of view so the entrepreneur-VC relationship is one of partnership and mutual benefit/success instead of the us vs. them mentality!

    1. fredwilson

      That’s one of the goals of this blog. Thanks for saying that

  21. Scott Austin

    Hi Fred — Why aren’t we bringing the fact that this was an all-stock deal into the equation? The investors we talked to at VentureWire say that they decided to take all stock because they were able to get a better price that way, and they plan to hold onto the stock for awhile until it recovers. So the returns actually could be much better once that cash gets distributed, right? Cisco’s stock, which may become a part of the DJIA soon, is widely considered to be undervalued and has already gone up 11% this month.

    1. fredwilson

      Great point. I failed to bring that up

  22. LD

    A thoughtful discussion. Sorry I’m late to the game.If taken from an LPs perspective, you should layer in OUR slugging percentage as well. It has proven very difficult for LPs to realize strong returns in any sort of venture on a portfolio level. Just for fun, suggest that we get it right about as often our all of our wonderful venture partners. That seriously dilutes your total projected return on a portfolio of venture investments.Let’s take a real life example. Over the past ten years, we have a return of roughly 9% to show for our venture capital investing. Is that enough? NO, is my initial reaction and I think the final answer but I think it takes some consideration.We certainly don’t seek to return an absolute 9% return when we invest with venture funds. However, when you take the cash flows and compare them to what we might have earned in the public markets, the return starts to become more attractive. Venture outperformed by a great margin and represents $XX million more in total returns for the portfolio. Right? I mean it did outperform the Nasdaq???The relative return starts to sound pretty good but then you consider that we earned a total diversified portfolio return slightly higher over this same period. This means that venture was, at best, not a drag on the portfolio. I thought venture was supposed to be the “juice” in our portfolio? (there I did work in a baseball analogy) An institutional investor has to consider all of the possible investment exposures and, unfortunately, it does not appear that we were rewarded for our venture investments over this same period.In our minds, we need to be rewarded for the illiquidity (yes we do have to budget for cash flows and retain a slightly higher cash drag than optimal), and the technology/execution risk we are taking at the portfolio company level. As it turns out, we have also experienced a fair amount of business risk with some of the GPs as well.A couple of other issues:1) The length of investment makes it difficult to measure your own (LPs) staff ability to pick managers and you may be throwing new commitments at bad managers.2)Access to the best, most proven, funds is difficult and not scalable3)VCs are proud of their fees and often themselves.Though having been an active investor in both early and late stage VC, we do struggle to justify the allocation of bandwidth and capital. We think that LPs need to be more selective in their commitments and not try to push too much money into a portion of their portfolio that requires high returns. Venture is less an asset class as an opportunistic, high returning investment for LPs.We still believe that, done properly, venture capital can be one of the highest returning investments for the portfolio. On one end, we’ve concentrated on smaller funds where a single deal can return a meaningful portion of the fund (homeruns). At the other, we’ve invested with late stage or growth equity players that should have a higher slugging percentage. We are focused on multiples expecting that the early stage guys return a NET multiple with a 3 handle and that the Growth equity guys should be in the high 2’s, though the IRRs should work themselves out based on holding periods. Maybe our return expectations are too high? Or our slugging percentage is too low? It just seems that we need to seek these returns or you’ll end up back in bonds. And nobody likes Bonds.

    1. fredwilson

      Lindel:This is a great comment and certainly explains a lot about how LPs think about venture returnsI hope you can find a model that works because we love having you and UTIMCO as investors in Union Square Ventures

    2. Peter Parker

      Hi Lindel, Venture has been very strange since about 1998. The numbers from 1968-1998 were very consistent and you are right to imply that there was less money, lower allocations by LP’s and fewer GP’s (and fewer bad GP’s). Fred knows this from his Euclid days. Subsequent to that, there was the bubble, and after that was the timeframe (probably ’01-’07) where buyout was a much better segment, but hedge was best of all. By the way, my sense is that the hedge funds still are better than the portfolio average, and better than venture, while buyout is moribund. I would like to see LP’s leave the asset class. Early stage venture will never go away. The GP’s have a unique position as they access ideas which represent true market dislocations. As such, they can exploit these to make non-market returns. The problem for the LP’s is too much money being thrown at unproven managers and that all started in the mid to late 90’s, particularly with the entry of the State pension funds into the business. Good LP’s will find good managers and continue to make the larger returns they need to keep their programs going. Peter

      1. fredwilson

        I think you are right peter but I’d rather not have to find a whole bunch of new LPs. And our LPs are almost entirely public pension funds and fund of funds who manage money for public pension funds

    3. Steven Kane

      Great info and perspective — thanks so much for joining the discussion. One of the big unfortunate issues with VC is, the LPs do not speak up about what they are seeing, past present and future. LPs are THE ultimate judge and jury of the VC asset class — not to mention its mothers milk and raison d’etre. (Phew, thats the most mixed metaphor I’ve ever had the pleasure of composing.)Maybe someday the LPs will get together and demand an end to the many ridiculous VC practices — huge management fees, excessive partner compensation, requirements that portfolio companies pay due diligence and closing costs etc etc etc — that undermine the asset class, and harm innovation, entrepreneurship and LPs own masters (pensions and endowments). If just a few LPs started policing their underperforming VC funds with even a modicum of backbone, the entire industry would wither and regrow stronger almost instantly