It is well known that the collective performance of venture capital funds over the past decade, since the crash of the technology bubble, has not lived up to expectations. Based on performance data for more than 700 venture capital funds (excluding early stage funds), we analyzed the IRRs of venture funds of vintages 1996 to 2007.
Vintage 1997 funds have the highest median IRR of all of the vintages, at around 23%, and funds of this vintage require extremely high returns – in excess of 75% – to be considered a top quartile fund in terms of IRR. The best performing vintage 1996 venture funds also produced impressive returns, with an IRR over 62% required for a fund to be in the top quartile for this vintage.
For the vintages following these, the technology crash affected the overall performance of venture funds, and returns have struggled to recover since. The median vintage 1998 venture fund has still produced a positive IRR, at just over 6%, and a 17.5% IRR is required for a fund to be in the top quartile. However, the median fund for each of the three following vintages has a negative IRR, and top quartile performance is also significantly lower.
Nearly 35% of vintage 1996 venture funds in the sample, and more than half of vintage 1997 funds, have produced IRRs of 20% or more. Nearly one-fifth of vintage 1998 funds have also done so, but the figures then fall away further for vintages following this, with less than 5% of vintage 1999 and 2000 venture funds returning 20% or more. The figure for vintage 2005 funds suggests some improvement in venture fund performance, with nearly 20% of funds achieving an IRR of 20% or more, despite the median fund still being in the red.
While the median venture capital fund’s performance has fluctuated around 0% for vintages 1999 to 2007, investors with good fund selection skills are still able to achieve significant returns from the asset class.
This blog is an extract from this month's Private Equity Spotlight, Preqin’s free monthly newsletter. This month’s edition is a venture capital special. If you are interested in receiving Private Equity Spotlight, please sign up here: www.preqin.com/spotlight