"I’ve heard that the vast majority of VC funds have been in the red for nearly a decade. Is it true? If so, can the industry survive?"  Those were the questions posed by PE Week Wire™ editor Dan Primack to a recent San Francisco gathering of National Venture Capital Association (NVCA) staffers.  The answer: red faces and stone walls. 

For a more telling source, Primack looked at the latest data from NVCA and Thomson Financial on VC performance (available here).  “Venture capital performance continued to show positive returns across most investment horizons ending March 31, 2007,” the report said, citing average five-year returns for all VC at 2.7%, with far stronger performance for one-year (18.1%), three-year (9.6%), 10-year (21%) and 20-year (16.4%).  “Only the five-year underperformed the Nasdaq or S&P 500,” Primack commented, “and that can be chalked up to venture getting hit particularly hard by the Internet bubble burst.”

But averages of the data may be artificially inflated by outstanding performance in the top two deciles. “A look at the medians reveals a much sorrier state of affairs.”  Funds raised between 2001 and 2007 have a median rate of return of negative 2.6%. Moreover, the upper quartile benchmark of 4.1% means that “the vast majority of VC funds raised since 2001 have underperformed a typical savings account.”

Primack concludes by posing another, possibly rhetorical question. “VCs were paying relatively low valuations for companies between 2003 and 2005 (or at least should have been), and the IPO and M&A windows have been steadily improving. If most funds are losing money in that environment, then what happens when some of today’s inflated valuations—particularly in clean-tech and later-stage deals—come home to roost?”