C&B Notes

A Candid Look at Venture Capital Investing

The Kaufman Foundation recently published a report sharing findings from their investments in nearly 100 venture capital funds over the past 20 years.  While the entire report is worth a read, several excerpts were particularly memorable:

  • “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.  The majority of funds — sixty-two out of 100 — failed to exceed returns available from the public markets, after fees and carry were paid.”
  • “Limited Partners — foundations, endowments, and state pension funds — invest too much capital in underperforming venture capital funds on frequently mis-aligned terms.  Our research suggests that investors like us succumb time and again to narrative fallacies, a well-studied behavioral finance bias.”
  • “The cumulative effect of fees, carry, and the uneven nature of venture investing ultimately left us with sixty-nine funds (78 percent) that did not achieve returns sufficient to reward us for patient, expensive, long-term investing.”
  • “The typical GP commits only 1 percent of partner dollars to a new fund while LPs commit 99 percent. These economics insulate GPs from personal income effects of poor fund returns and encourages them to focus on generating short-term, high IRRs by ‘flipping’ companies rather than committing to long-term, scale growth of a startup.”

In total, these findings call to mind this excerpt from Graham and Dodd’s Security Analysis:

An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.

Via Jason Zweig (via Simon Lack at the ‘In Pursuit of Value’ blog)