Early rates of return of 131 venture capital funds started 1978–1984

Abstract

The organized venture capital industry is now more than 40 years old. In the last decade, the pool of venture capital has increased almost tenfold to a current total of about $30 billion. Despite its comparative maturity, there has been no systematic tracking of the financial performance of the industry. An extensive search of the scholarly literature found that published information on rates of return was skimpy and not very reliable. In response to the need for valid and reliable industrywide rates of return. Venture Economics launched a data base in 1985 that records the rates of return of venture capital funds quarterly. For the period 1970–1984, there are 131 different funds in the data base. For the period 1970–1978, the data base covers 15% of all new capital committed to private funds; for the period 1981–1982, it covers 50%. Venture Economics adds funds to the data base on an ongoing basis. Preliminary analysis of the compound annual rates of return for the period 1978–1985 shows that funds started in 1978–1979 performed magnificently, with returns well in excess of the oft-quoted industry expectation of 25–30%. Funds started in the later part of the period did not perform nearly as well. However, it is much too early to make any predictions about the final rates of return of the funds because the oldest fund for which the rates are presented in this paper was 7 years old and the youngest was 15 months. Because they will have a life of at least 10 years, these funds have a long way to go before their portfolios are fully harvested and their final rates of return are known. The implications of the work reported in this paper will be derived from the following fact: The rates of return of venture capital are being recorded in a systematic way for the first time in the history of the organized industry. It is now possible to study the performance of venture capital with valid and reliable data. We expect that those studies will cover a range of applications from pragmatic analyses such as the performance of investment portfolios to theoretical questions such as the efficiency of the market in allocating venture capital.