The Holy Grail: Tracking Top Venture Capital Returns
Vivian Guo | July 30, 2015
firms like Cambridge Associates and Thomson Reuters regularly release benchmark statistics in the venture
capital and private equity space which give us an indication of target returns,
but what we really want are the numbers from specific venture capital funds to
see who has that next Facebook. So here
at EquityZen, we’ve been trying to figure out a way to identify and compare the
returns of top performing venture capital funds – something we informally like
to call the Holy Grail.
it might be useful to share this information with the community, and it
certainly doesn’t hurt that many of the investment opportunities on our
platform are in companies backed by the same top tier of venture capital
firms. As a disclaimer, this information
is just a starting point and certainly doesn’t correlate to the exact returns
of venture funds.
Venture funds are often measured by, and raise their funds on the strength of, their net internal rate of return ("IRR"). Net IRR measures an investment's yield by providing its expected rate of return. In financial terms, it is the discount rate that equates the net present value of cash flows to zero, net of management fees and carried interest. Metrics such as IRR are very difficult to find for individual venture funds and not
usually publicly available. As such, here
are two possible ways of identifying top venture funds:
1. The Unicorn Whisperers
(Note: Unicorns in this list are limited to early stage startups.)
easy way of identifying strong venture capital firms is to look at the number
of unicorns they have produced. If we
look at early-stage investments in startups like Dropbox and Evernote that
eventually become billion-dollar “unicorns,” Sequoia Capital comes out on top
with 17 companies in its portfolio. SV
Angel and First Round Capital follow with 9 and 8 investments respectively, and
Accel Partners, Benchmark, and Khosla Ventures tie for 4th
place with 7 investments.
those that are curious, if we look at all-time investments (including
late-stage deals and follow-on investments), the top 5 investors would be
Sequoia Capital (17), Kleiner Perkins Caufield Byers (15), Andreessen Horowitz
(15), T. Rowe Price (14), and SV Angel (12).
2. The Money Makers
other method that we are more interested in is a way to identify the top
performing venture funds. Since venture
firms do not publicly disclose these numbers, we had to come up with creative
ways to figure out returns.
One available (although paid) resource is the Preqin database. The database reports net IRR per fund but unfortunately does not paint a full or accurate picture of fund performance as its numbers are self-reported; it also lacks returns from many prominent funds. However, it is a great starting point for investors.
way of obtaining IRR numbers (other than through cash flows) is to look at the
yields of pension funds. Since pension
funds are required to disclose their private investment holdings and returns,
we looked at a few select ones such as CalPERS, UTIMCO, OPERF,
and MainePERS to see if there was a common
thread. It’s difficult to get an
accurate picture of fund performance across different vintage years (funds
circa 2000 will have very different benchmarks than ones raised recently), but
across the different pension funds there were a few fund managers such as Union
Square Ventures that have historically done well.
(Note: Average Net IRR is calculated using the average of all funds over all vintage years.)
3. So What Does This All Mean?
The first takeaway is
that the funds with the top returns come from the prominent venture capital firms we all know and love. Some notable VCs to follow are Sequoia Capital, Union Square Ventures, Institutional Venture Partners, Accel Partners, and Technology Crossover Ventures. Second, funds can be successful without a large number of billion-dollar valuation investments and a herd of unicorns. Union Square Ventures does not rank even in the top 10 of unicorn chasers; however, it boasts the highest pension IRR and over 8% of its 62 early-stage investments have been unicorns. Additionally, if you don't have a subscription to a private database with robust information on funds, you can take a look at the investors of the 100+ unicorns as a very rough proxy for portfolio quality.
Unless you're Stanford's endowment or CalPERS it may be tough to get an allocation into a top tier VC's latest fund, especially with a check south of $1 million. However, using the tools above, you can figure out which VCs are doing the best, and attempt to track their portfolio through a platform like EquityZen, all with a check size as small as $20,000.
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