Fred Wilson Showcases the Dismal Average VC Returns of Past 10 Years


 Fred Wilson writes on his blog yesterday that VCs “are in a tough business” – and he has the depressing numbers to show for it.

Cambridge Associates compiled short-term and long-term returns of top-rated “early-stage” funds from the past 10 years, “later and expansion-stage” funds and “multi-stage” focus funds, and compared the data to three stock indexes. “Later and expansion-stage” VCs performed the best in the long-term, averaging 9.3% — beating the Dow Jones and S&P 500, but losing to the Nasdaq Composite by a full percentage point. Neither “early-stage” or “multi-stage” funds beat the indexes at any point. “Early-stage” funds held a 10-year average return of 3.9%.

And the numbers didn’t even include the Internet bubble of the late 1990s.

Wilson notes that none of the funds broke double-digits at any points – even though he was taught early on that venture capital firms must provide 20% annual returns to limited partners to remain solvent.

Wilson further explains that “early-stage” firms perform so poorly because they are taking the biggest risk with untested ventures – even though, theoretically, the risks should pay off with bigger rewards. “Later and expansion stage” VCs are able to latch onto established winners and thus have greater security in investing.

For all future VCs, take note – you might be better dumping your money in the Nasdaq.