Please enter your email address


Please login to print this page


The New Reality of the 14-Year Venture Capital Fund

Venture capitalists structure and market their funds based on a ten-year fund life. In actuality, only about 7 percent of funds liquidate within a decade, and recent data on fund duration indicate that the median fund takes slightly longer than 14 years to end.

The problem for limited partners is that we bear the costs of longer than expected VC fund lives — the stranded capital, greater illiquidity and additional management fees — but are seldom compensated for doing so.

The longer timeline to liquidation itself is not the concern. It’s easy to understand that exit markets are volatile and difficult to time, and that early-stage companies can take a long while to grow, gain traction and grow more in order to maximize their potential and value. The central issue for limited partners is that so few venture capital funds deliver the minimum 300 to 500 basis points of performance above the public markets to compensate for just ten years of expected illiquidity and fees. Hardly any generate the even greater returns needed to compensate investors for the illiquidity and fees of a capital commitment of 14 years or longer.

In the portfolio of the Kauffman Foundation, where I’m a senior fellow, 45 percent of our VC funds exceed their ten-year life. Of those, 65 percent have a duration of more than 12 years. When I give talks about investing in venture capital, I like to joke that we have funds in our portfolio that are old enough to drive and vote. We don’t yet have any old enough to drink — but we’re close. 

The foundation is not alone in its experience. In 2013 the National Venture Capital Association published an analysis conducted by Chicago-based private equity management firm Adams Street Partners of the duration of more than 100 technology funds. The results showed that a paltry 7 percent of funds ended within the projected ten-year timeframe. VC fund extensions are the new norm, and most fund limited-partnership agreements (LPAs) include the option of at least two one-year extensions that increase their fund life to 12 years. Yet only 20 percent of funds were able to liquidate during that two-year extension period. The median time to liquidation is actually a little more than 14 years. Nearly half (46 percent) of funds take 15 years or longer to end.

Source: NVCA Yearbook, 2013. Adams Street Partners data analysis of the fund life of IT/technology funds.

Leave a Comment    (4)

Comment
  • POST

Great stats and commentary but totally ignorant about long term trends. Venture capital is the beginning of innovation that takes a lot of work. Venture capitalists are not sitting in their offices looking screens but getting hands on involved in building companies. Most of them are NOT taking $1 million+ salaries as do hedge fund or many large private equity funds either. Why don't we trun things around and comp people and then job content and you will venture capitalists do much more than hedge fund managers.

Innovation is a continuum. If you dont finance the beginning, don't expect to get anything out at the end. Internet came from venture capital, mobile came from venture capital and cleantech is coming from venture capital. Hedge funds and private equity are making money but venture capital blazing trail and actually delivering future market leaders ! Now this part is not in any stats.

Returns are consistently there from good funds and over time. When venture capital is invested in good companies, they make money and lots of it. skype, uber, facebook, mobile phone apps, whatsapp, nest, tesla are just a small number of innovations financed bt the same people trashed in this article. And did investors behind these deals make money ? Yes.

How about biotech ? chances are pretty good that most of you will.be saved from dying early and it will be not because big pharma created something but because 3 - 4 guys got together and found some venture capitalist to finance their discovery.

Venture capital is a profession that is focused on bringing innovation to the market. In good market, it delivers strong return. In poor market it doesnot. Private equity and hedge fund make plenty of money at all times. But there is no private equity, growth in listed tech companies, impact of our lives without venture capital.

You can be a critic if you can live a week without innovations financed by venture capital. Try it !

My advice will be to get involved with venture capitalists and find ways to make this industry work for you as well.

Apr 27 2015 at 11:51 PM EST

NL
 

Great post! If and how do you see this impact how the VC market works?

Mar 09 2015 at 9:15 PM EST

Vivek Vadakkuppattu
 

Very useful contribution. Would be interesting to know how much capital is tied up in such long term funds. Creates a real pain point of there is a correction in the tech funding market.

Feb 25 2015 at 1:29 AM EST

Kenny Fraser
 

Great stats and commentary. I'd love to see similar research regarding private equity in general. I'd be surprised if the average life of buyout funds is not significantly longer than ten years.

Feb 24 2015 at 7:55 AM EST

David Lanchner