Tuesday, October 31, 2006

It’s A Great Time To Be A VC

Or, rather...

It's A Good Time To Raise A New VC Fund.

The NVCA and Thomson Financial released the Private Equity Performance Index numbers for Q2 2006.

Matt Marshall (VentureBeat) wrote:

All private investors, from venture capitalists to buyout guys, are doing very well.

If you look at the table below, you'll see that the early stage venture capitalists who invested over the past ten years have averaged a whopping 37 percent return annually, according to the latest data from Thomson Financial. Those VCs have done the best among all investors.

The table is in the NVCA report.

Dan Primack of PE Week Wire has this to say:
Dow believes that VCs are blindly adhering to the following article of faith: Short-term ROI isn't very good, but long-term investment in the VC asset class will outperform most major public indices. After all, some variation of that line has been in every Thomson/NVCA performance press release that I can remember (including today’s). So “stick with us,” the VCs tell their LPs, because "we’ll make you money in the end."

The “blind” part is that such statements do not seem to acknowledge that the 10-year VC performance figures are around one year away from a harrowing fall. In fact, it may have already begun.

I have to believe that the majority of the LPs that invest in Venture Capital and Private Equity "get" this already. For "VC" in particular, the bubble bust may have been bigger than the bubble boom. I.e., it doesn't take long to get drunk and feel great, but the hangover seems to last for a much longer time.

Even if this turns out to be true, and the 10-year return averages fall significantly, does it invalidate the VC asset class? I don't think so.

So, surely, corrections are ahead for the VC asset class and the numbers will get worse before they get better. I will grant you that. But:

  1. The LPs are smart, it's their money, and they understand this.

  2. The LPs have demonstrated their faith and commitment to the VC asset class by putting increasingly larger allocations to VC (larger in the absolute, not necessarily larger in the percentage of their individual allocation).

  3. The LPs have a very long-term view of VC investments, rightly so.

So, if Dow is right (see my comments on this) and things will get significantly worse for VC, then it will become progressively harder for folks, including Sevin Rosen, to raise a new fund in the next few years. The concern is that the LPs will lose faith in the asset class. But, if the LPs are willing to invest now, then...

It's a good time to raise a new VC fund.

And, start building returns for the next 10 years of Venture Capital, which will very likely be better than the past 10 years.

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