Wednesday, October 24, 2012

Angel and VC Returns: Show Me the Money!

The number of Angel Investors continues to grow while the number of Venture Capital firms shrinks, this drama being played against a backdrop of a decade of economic malaise. Yet the day is not far off when it will become obvious that Angels contribute more to society than VCs: more money, more new companies, more mentorship, more regional dispersion, more opportunity for everyone.  But why is this happening? Angels invest for many reasons: to help the new guy, to be part of the action, to handle our own money, to make our own investment decisions; but what about the money?

Dueling having been discredited, it is hard to devise an efficient method for resolving disputes about competing approaches to early stage investing. Confronted with an opinion like the following, many of us might be rendered almost speechless. “I would also add that it probably makes more sense for would-be angels to invest their capital into seed VC funds like Jeff's (if they can get in) and let the pros invest the capital.”(Note 1)

Having written recently on angel returns, and earlier on the incredible shrinking VC industry, this post deals with a results based approach: comparing returns, most commonly referred to as IRR, Internal Rate of Return, which is the closest thing to a single figure for comparing fund performance. For some investments, like bank accounts, the internal rate of return is easy to figure because the bank tells you what it is. For example, a 5% simple interest bank account has an internal rate of return of 5%. For a more comprehensive definition, start with the Wikipedia and click on forward from there.

What makes this comparison difficult? Most VCs conceal their IRRs as closely as their hole cards in a Texas hold ‘em tournament. But thanks to Dan Primak (Note 2), I can share some IRR results with you for some of the funds our NE Angels deal with.

Let’s start with a group we know and like,  MassVentures (formerly MTDC).  Vice President Nick Pappas attends our Regional Summits. Most recently they co-invested with our eCoast Angels and many other well-known local angels in Libboo, a Techstars company, where they were the second largest investor (behind eCoast).  I consider MassVentures a real asset to our start-up community.  Nonetheless, their IRR is 1.91% (Check Note 3, Nick says more).

One of the large fund managers most visible to local angels and entrepreneurs is Polaris Venture Partners, due in part to their sponsorship of startup space Dogpatch Labs and to the high twitter and industry profile of some of their partners, particularly Venture Partner Bob Metcalf. Here are results for three of their funds.

Polaris Venture Partners III, LP (2000)                (3.03)%
Polaris Venture Partners IV, LP (2002)               2.45%
Polaris Venture Partners V, LP (2006)                 8.78%

Other funds active here in New England include the following.

Charles River Partnership XI                               7.85%
Commonwealth Capital Ventures                        0.66%
Commonwealth Capital Ventures II                    13.50%
Flagship Ventures Fund 2004, LP                        (2.22)%
Highland Capital Partners Fund VII, LP              (0.67)%
Spark Capital                                                      10.12%
Venture Capital Fund of NE II, LP                      1.42%

For comparison, there are published industry averages for IRR, based on the year the fund was established.  For example, for the three Polaris managed funds, here is how they stack up against industry averages.

Year            Median IRR          Polaris IRR
2000           12.38%                 (3.03)%
2002           16.61%                 2.45%
2006           8.29%                   8.78%

In addition to the above, Primak privately obtained performance data for several noted funds, although presented in a different format. Below, the percentage is the 12/31/2011 portfolio value (including cumulative distributions) divided by the called capital. In parenthesis is the cumulative distribution divided by called capital. “In both cases, 100% is break-even (well, until you include fees),” says Primak.

Benchmark Capital IV (1999): 133% (109%)
General Catalyst II (2001): 149% (53%)
HIG Venture Partners (2000): 44% (22%)
Kodiak Venture Partners II (2000): 35% (4%)
Nokia Venture Partners II (2000): 56% (35%)
Onset Ventures IV (2000): 31% (4%)
Sigma Partners VI (2001): 125% (75%)
Softbank Capital Partners (1999): 21% (21%)

Top Angel Jean Hammond points out that the tables above don’t include key active players like Founder Collective, Next Stage, Point Judith, and 406.  Alas, I have no data for them, but if they wish to send me some, I’ll type them right in. The same goes for Angel Funds such as Common Angels and Golden Seeds. 

Conclusions?  Are you better off as an Angel or as a limited partner in a VC fund? The data we have is inconclusive; you’ll have to decide for yourself. Wiltbank, in a 2007 study, showed Angel IRR as 27%.  Locally, George Schwenk  of the Breakfast Club  is above  29% for an extended period. As you consider this, remember that the top performing funds, typically located near San Francisco, are not likely to let you invest unless you are incredibly wealthy and well connected.

Will venture funds continue shrinking?  Unless they also manage other, better performing funds, some of the partnerships mentioned above will be unable to raise funds in the future.  I believe two of them have already ceased operations. 
Wouldn’t it be nice to have more data?  I’ll do my best to keep you posted on Angel group exits and performance, but I need your help sharing your data with other Angels.
Note 1.  This comment and related discussion comes from a post, “Wow, Angel Investing Isn’t Crazy,” at the Golden Seeds Group on LinkedIn.

Note 2. Dan Primack writes “The Term Sheet,”'s daily email about deals and deal-makers.  He provided the data on VC returns.   You can find IRR figures from Mass. Pension Reserves here.  Click here for exclusive returns for brand name VC funds.

Note 3. Nick Pappas writes: "Thanks for the call out in your article, however, the IRR you list for us taken from the PRIM report is extremely misleading. It represents the net return on $2m we managed for them back in 1986  – clearly not relevant data for your blog today. It is a very small slice of the money we have put to work over the years: $2m of a total of $85M invested and 10 of 133 companies.
 On a gross basis, our historical IRR calculated as of 6/30/12 is 14.4% over the life of the group. As you know, we are an evergreen fund so it is difficult to track vintage year funds as you would in traditional private venture firm. While IRR is an important benchmark, as an economic development agency we also pay close attention to employment figures and how much private capital follows our investment.
 It would be great if you could adjust your posting. I don’t take issue with the point you are making but it is misleading to quote our IRR as 1.9% As an evergreen fund, if that was our historical return, we would be out of business pretty quick.”

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