Investing In Startups Is A Terrible Way To Make Money

poor entrepreneur ceo

A few weeks back I took a call from a group looking to start a new seed fund. After exchanging backgrounds and niceties I asked why they wanted to start the fund. Their response? To make money.

My response? They’d make more money putting their cash into a money market account. That’s not very sexy or exciting but it’s reality. Today’s data from Cambridge Associates backs that up. From the report:

The median net return to VC fund investors has not been positive for any vintage year since 1998. Just think about that for a moment. Despite the past decade’s many hits (Google, YouTube, EqualLogic, etc.), the typical VC fund has lost money for its limited partners. Even the top-quartile benchmarks aren’t very impressive over the past decade, with the best figure coming in at 5.59% for 2001 vintage funds. 

No wonder how many institutional investors have mostly turned their back on venture capital as an asset class. If things don’t turn around soon, even some of the holdouts might begin to reconsider.

While we were raising our most recent fund, an extremely successful institutional investor shared with us a dirty little secret. Of the all the funds they’d backed since 2000, only 2 of them had returned 2x capital and those returns were driven by 1 company in each of those respective firms’s portfolios. A bleak mashup of data points.

A few thoughts:

  • First, I’m terribly grateful for the investors who back OATV. They see this same data too. They believe we can be an outlier who bucks the trend. I feel a strong sense of stewardship for their capital, appreciation for their trust and optimism that we can return it to them many times over.
  • I know I jab at big VCs from to time, but a handful of them have been delivering outsized returns for decades now. They don’t call Sequoia, Accel, Benchmark, KP, Matrix, Greylock “top tier” for nothing. They’ve figured out a few things related to building enduring companies and consistently delivering returns for their investors. I respect that.
  • If you’re going to start a new fund, be different. Proprietary dealflow, investment stage, operating experience or deep network of industry contacts are meaningless buzzwords that aren’t going to set you apart from the pack. As SuperLP says “to do something outstanding takes audacity.  And indeed, private equity should be all about audacity”. Being the 10th seed fund, or 5th “opportunity” fund isn’t going to set you apart form the pack. Be different.
  • Building a venture fund, like the start ups we back, is hard. Our chances of success aren’t much better than theirs. Like those start ups, the chips are definitely stacked against us. Despite all that, if you believe you have something different to offer, you fight like hell to bring it to market and you have an disproportionate dose of luck you can build a firm that proves an outlier to this data.

2011 marks my first complete decade as a VC. As these numbers point out, it hasn’t been pretty. But I remain optimistic. I see a strong set of firms in the top tier. I see a new crop of firms thinking differently about the business of building businsses. Most importantly, I see more markets than ever ripe for disruption and a wave of entrepreneurs who have the technologies and know how to do so.

As is usually the case, the chips are stacked against all of us. But, we wouldn’t have it any other way.

hedge funds

This post originally appeared on BRYCE DOT VC.

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