No reason to panic yet about the performance of venture capital funds
About the last years the venture industry has struggled. Many feared that the bull market had pushed valuations to unsustainable heights and would result in a windfall of startup down rounds and cash burn, negatively impacting the performance of venture capital funds. But before SVB failed, things were going relatively well.
It might appear that the opposite is true, at least according to a report about the donation from the University of California. But since this report only looked at funds with vintages of 2018 or later – which have not yet reached the critical J-curve – calling these funds “underperforming” wouldn’t tell the whole story, because the numbers don’t add up. taking into account the life cycle of the fund.
Let’s break it down. Most fund lifecycles are around 10 years, but they don’t start making money right away – by design. A fund usually invests the capital for three to five years, as a result of which the ‘performance’ decreases. Once the fund is deployed, it hits that “J-curve” and begins to see its value rise sharply again as the assets in the fund increase in value.
There are ways to disrupt this timeline: VC firms can sometimes back a company at a relatively early stage and exit the investment within 12 months. But 2021 was not normal. Other than the past two years, what happened at Sequoia would be perfectly normal in an otherwise healthy market.
So how were most venture capital funds Actually performing? Data shows that venture capital funds generally performed well, although they were not immune to market pressures.
A recent PitchBook report looked at the fund performance of venture capital funds at all stages, regardless of maturity. The report found that the rolling one-year IRR was 2.8%, the lowest since the fourth quarter of 2016, a not particularly bad year for companies.
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