Wednesday, October 30, 2013

VC vs S&P 500? The public markets continue to win!

The Cambridge Associates Benchmarks provide a regular health check on the overall Venture Capital industry - it doesn't make for a great story! (In recent years anyway.) My optimistic conclusion continues to be that Angel Investors, being devoid of VC level fees, have a better chance of capturing additional returns to risk ... the data seems to bear that hypothesis out on the average, although with the winners being asymmetrically distributed to those with great skill, more likely a lot of luck and certainly a well diversified portfolio!

The 2Q VC 2013 data provides a reminder that, at least for LPs and in aggregate, investors in venture capital funds are not compensated for the additional risk they assume be it operational or liquidity related.

My three high level take on this latest data is as follows:

1. VCs collectively haven't beaten the S&P 500 for a decade:
The data shows 1, 3 and 5 year net to LP returns lag the public markets while the 10 year record is roughly a wash.

2. The glory days are decades back:
For any early VC investor lucky enough to be reviewing 15-30 year returns the picture is dramatically better with substantial out performance by VC vs the public markets over that much longer time frame. This likely reflects a period when these early stage markets were considerably less "efficient" then they are now.

3. Late/expansion stage funds have delivered better results than early stage funds of late:
Over the last decade to a modest or greater degree late/expansion stage funds have continued to outperform early stage funds and indeed over 5 and 10 year time horizons the S&P. (This is an inversion of the early years of VC as revealed in this data ... looking back over all of the 15/20/25/30 horizons early stage trounced late/expansion stage and indeed crushed the performance of the broader public market indicies!)

As I noted in two prior posts:
1. Gross VC returns are better than the Cambridge Associates net of fees numbers:
Obviously this is because of the 2/20% feee structure which, on the face of its, has eaten up all VC excess returns in recent years.
2. As a set of pooled investment vehicles VC has some similar disappointing return characteristics to Hedge Funds and Mutual Funds:
The point being that all in aggregate have struggled to beat public benchmarks in recent years, keeping at least Nobel prize winner Eugene Fama happy. 

PS VC size does matter, smaller is better: As an important footnote to the aggregate VC returns discussion, John Frankel of ff Venture Capital reminded me of the Kauffman findings pointing to the concentration of higher returns amongst smaller VC funds. Again this parallels the Hedge Fund experience. ie the larger asset under management funds are holding the overall averages "down" and you are more likely to find VC funds that deliver returns that look respectable, after fees, that are sub $500mn or so.