Thursday, August 1, 2013

Venture performance continues to lag as the industry struggles

According to PrEQIn's private equity indices, the performance of US venture capital funds continues to lag other types of private funds. While the venture index is now above the pre-recession high, it is still significantly below the pre-2001 bubble.


Part of the issue is that the venture industry as a whole is struggling, with too many funds chasing too few promising investments.
BW: - The growing consensus about venture capitalism in Silicon Valley is that too many funds are chasing too few truly great companies, a view described recently by VC pioneer Bill Draper [here] and others. There are signs the industry is contracting. VC firms raised $2.9 billion in the second quarter of 2013, according to the National Venture Capital Association and Thomson Reuters. That’s 54 percent less than in the same period a year ago.
But how has the asset class performed over the long term relative to the broad public markets? According to Cambridge Associates, venture beat the S&P500 only if one invested in it some 15 years ago and kept reinvesting the proceeds back into the asset class. A more recent investment would have underperformed.

Source: Cambridge Associates (as of Q1 2013; click to enlarge)

These performance numbers however hide the full story. The charts below compare the performance of the S&P500 index and the Cambridge venture index over the past 25 years. While venture clearly outperformed the broad index over such a long period, anyone investing in venture this far back would have been in for a hell of a ride.

Source: Ycharts, Cambridge Associates

Venture is vital to the US economy. The market however is highly competitive, the risks to investors are significant (with so many of the portfolio companies failing), and it takes years to harvest the investments (while managers accrue fees - see J-curve). Venture funds are a tough sell for investors and even tougher to run as a profitable business.
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