The
Dow Jones Average closed at its highest point in history yesterday. So how do public stocks now compare with VC
returns? Our analysis lags a bit in time. DJIA heights hit the TV news right away,
while the only reliable source of broad-scale VC returns comes though the
National Venture Capital Association (NVCA) and takes a while to collect. That said, here are most recent short term
and long term returns for the venture capital business over the past ten years
compared to the public equity markets in the US.
We
suspect that if the chart above were updated in real time it would be a bad day
for the VCs and perhaps for the Angels too.
For
over a decade we have been using charts similar to that above when we lecture in
Jeff Sohl’s private equity class at UNH.
Reliably, for most of that time, the best returns have been realized in
early stage funds. I then argue, by reference, that this “sweet spot” is the
best place for angels to concentrate. Woe is me! Based on this chart, the sweet
spots might well be an index fund and a home on the beach.
How
the mighty are falling.
The
conventional wisdom in the industry says that even though average VC returns
are down, the large and famous funds, the flagships of the industry, continue to
do well. The evidence lies in the fact
that certain firms have been very successful in raising new funds. For example, Spark
Capital in Boston, a venture capital investor in Twitter, Foursquare and Tumblr,
announced last month that is has raised $450 million in its largest fund to
date.
Yet to our surprise, the world’s best known
fund, Kleiner Perkins, may be feeling the strain. Dean Wormer of Faber College having retired,
they appear to have voluntarily placed themselves on double secret probation.
Reuters reports today that blue-chip venture-capital firm Kleiner Perkins Caufield & Byers expressed
frustration with poor fund performance and promised to do better at gatherings
for investors last month, according to people familiar with the discussions.
“The
firm, which has lost some of its shine recently due in part to hefty bets on
green energy technology and a lack of home-run Internet investments, said it
would be more careful with capital and redouble its efforts to boost
performance. Several investors who received invitations to the meetings said it
was unusual for Kleiner Perkins to hold such gatherings when it was not raising
new funds,” write Sarah McBride & Mark Boslet.
“They’re
just frustrated and upset that the performance hasn’t been as good as they
think it should be, and they are candid about it,” said one investor, or
limited partner, who attended one of the meetings and requested anonymity.
Why
do we call this double secret probation?
Because KPCB won’t identify which of their funds they are talking about
or what their returns (IRR) actually are. A spokeswoman for Kleiner Perkins said:
“Communications between Kleiner Perkins and its limited partners are private
and confidential. As such, we do not comment on them.”
Luckily,
Dan Primack of Term Sheet does comment. “So I reached out to some of the firm’s
investors, who tell me that Kleiner Perkins chose to significantly reduce
holding values on numerous portfolio companies for Q4, which was a change from
relatively static holding values used during the prior quarters. So these
meetings were to preempt LPs from being surprised when the year-end report
arrived.”
“Finally,
one LP also is sure to point out that performance ‘weakness’ is relative. ‘Current
KP funds are performing pretty well, not rock star but upper quartile.’”
Regular
readers of our e-pistles know that VC and angel returns are a topic we follow
closely. You can find more detail on this chart in the NVCA press release, located here. You can find more about Angel investment performance vs. VCs here
and here. Term Sheet is here.
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| Apparently, Tom Perkins of KPCB no longer owns this yacht, "The Maltese Falcon." |
