Venture Capital Funds: Long-term Performance

by Ben Lorica (last updated Dec/2011)

[Update: In Apr/2012, I created a related page "Private Equity Bakeoff: Buyout vs. Venture Capital".]

With the late 1990's dotcom bubble no longer part of the most recent 10-year window, Venture Capital returns over the past decade have been less than impressive. In the charts below I compare VC returns to those for the Dow Jones / Credit Suisse Hedge Fund indices, and to a series of standard U.S. financial indices. Before we get to the charts, here are some notes on the displayed values:

1. Data is through 6/30/2011

2. End-to-End performance = (Ending Value - Starting Value) / (Starting Value)

3. The values displayed are the Annualized End-to-End returns.

4. VC returns (from the National Venture Capital Association) are Net to Limited Partners1.

5. The Dow Jones / Credit Suisse Hedge Fund indices are asset weighted2, and draw from about 5,000 funds3. Unit Asset Value calculations4 are "net of any relevant fees or other deductions"

Over the most recent 3-year and 5-year periods, VC's and Hedge Funds produced comparable returns. But how do they compare longer time horizons? The late 1990's are unlikely to be replicated anytime soon, so if you're an investor, the prudent time horizon to use is the most recent 10 years. Over the 10-year period ending on 6/30/2011, the Cambridge Associates US Venture Capital Index yielded a little under 1.3%, compared to 7.9% for the DJ/Credit Suisse Hedge Fund index and 2.53% for the Nasdaq.

But if you were to include the 1990's dotcom bubble, VC returns are noticeably higher. Over the most recent 15-year period, VC's blow away Hedge Funds and index funds. Similarly VC funds produce superior end-to-end (annualized) returns over the most recent 20 & 25-year periods.

Time Period:

End-to-End (Annualized) Rate of Return
(period ending Jun/2011)

Related resources:
  • Private Equity Bakeoff: Buyout vs. Venture Capital

  • Hedge Fund profits flow mostly to Industry Insiders

  • When evaluating Investment Funds, use Dollar-weighted Returns

  • Data Mining with the Maximal Information Coefficient

  • Hedge Fund Performance: My semi-regular blog posts on the Dow Jones / Credit Suisse Hedge Fund indices.

  • (1) VC investors are referred to as Limited Partners (LP's), while Venture Capitalists themselves are General Partners (GP's). Compared to GP's, returns realized by LP's are lower because of management fees and the carry.

    (2) Asset weighted indices have their problems, as a commenter to my recent post recently pointed out.

    (3) Survivorship bias is a problem.

    (4) From the Dow Jones / Credit Suisse Index Rules: "The UAV of a Member Fund may be calculated by reference to various Proxies of the Member Fund held by the Investing Entity and will be net of any relevant fees or other deductions imposed on investments and redemptions (including, without limitation, subscription and redemption fees, managed account platform fees and the cost of funding)."  
    Back to Resources page.

    NOTE: Reproduction & reuse allowed under Creative Commons Attribution.    Creative Commons Attribution