VC has delivered poor returns for more than a decade
VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in VC. Speculation among industry insiders is that the VC model is broken, despite occasional high-profile successes like Groupon, Zynga, LinkedIn, and Facebook in recent years.
The Kauffman Foundation investment team analyzed our twenty-year history of venture investing experience in nearly 100 VC funds with some of the most notable and exclusive partnership “brands” and concluded that the Limited Partner (LP) investment model is broken. Limited Partners invest too much capital in underperforming venture capital funds on frequently mis-aligned terms. The research suggests that investors succumb time and again to narrative fallacies, a well-studied behavioral finance bias. They found in their own portfolio that:
- Only 20 of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995.
- The majority of funds—62 out of 100—failed to exceed returns available from the public markets, after fees and carry were paid.
- There is not consistent evidence of a J-curve in venture investing since 1997.
- Only 4 of 30 venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index.
- Of 88 venture funds in our sample, 66 failed to deliver expected venture rates of return in the first twenty-seven months (prior to serial fundraises).
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