Turning Back the VC Clock?

Just how badly have venture capital funds performed over the last decade?


If you had invested in venture capital in 1990, you should be sitting pretty. Venture capital funds outperformed all alternative asset classes as well as the public markets by a long mile.

But if you invested in 2000, you have a lot of explaining to do. Except for helping to fund seemingly extravagant VC lifestyles – Napa Valley vineyards, Net Jets shares, 100 meter yachts – as the below chart shows, there is little to show except red ink and capital calls.

So how badly have venture capitalists performed over the last decade?

Asset Classes 10-Year Performance 20-Year Performance
Venture Capital -1.5% 17.8%
NASDAQ -6.2% 9.1%
S&P 500 -2.4% 6.5%
Buyouts 4.0% 9.0%
Private Equity 2.8% 11.3%

Source: Thompson Reuters

Ironically, not as badly as the naysayers would have you believe. Over the last ten years, venture capital funds have actually outperformed the public market indices. That, given the nature of the public markets, shouldn’t be much of a surprise. But when compared to buyout and private equity funds, venture capital has fared poorly.

And if cash-strapped institutional investors today are asked to choose between the three alternative asset classes – private equity, buyouts and venture capital – there is little doubt that venture capitalists would come a distant third.


The problems are cyclical, venture capitalists and their co-practitioners like to say. There is too much money chasing too few deals. And once the industry shrinks – some estimate by as much as 50 percent – everything will return to the glory days.

One grizzled industry veteran disagrees. “The whole ‘shrink the industry and we will then prosper’ mantra is hooey cast in the clothing of macro economic argument,” writes venture capitalist Ed Goodman of Milestone Venture Partners in Milestone Matters, his quarterly newsletter. “This musical chairs view of the VC world is a nugatory one that sees the economy and the venture ecosystem within it as a static model rather than a dynamic one,” Goodman argues.

The static model simply plays up the status quo. “This perspective posits that there are a fixed number of attractive investments beckoning at any point in time and that their requirements can be met with the right amount of capital,” says Goodman. “In this delimited view of the landscape, the growth of GDP, new product ideas, innovative services, business model innovation and the creation of new markets, count for little.”

Goodman’s solution: VC firms must identify the emerging markets that promise outsized growth and marshal the resources to invest in them, rather than operating only within the markets that they are familiar and comfortable. Venture capitalists need to re-examine their investment theses, identify emerging markets, revisit their deal searching methodologies, examine investing personnel and get out and hustle for opportunities.

It isn’t simply that venture capitalists need to re-think their own business and business strategies; it’s the whole community that needs to revisit the concept.

In discussing the 1946 launch of American Research & Development, the first institutional venture fund, Senator Ralph Flanders noted that “the postwar prosperity of America depends in a large measure on finding financial support for that comparatively small percentage of new ideas and developments which give promise of expanded production and employment and an increased standard of living for the American people. We cannot float along indefinitely on the enterprise and vision of preceding generations.”

Senator Flanders and his co-founders MIT President Karl Compton and HBS Professor Georges Doriot imagined venture capital to be primarily a catalyst for development – risk capital that debt providers wouldn’t or couldn’t provide. ARD’s investment professionals didn’t have upfront management fees, they received a nominal consulting fee and options/stock in the companies they financed and nurtured. ARD’s early portfolio included High Voltage Engineering Corp., a producer of particle accelerators; Reaction Motors, a maker of liquid fueled rocket engines. In 1957, ARD invested $70,000 for a 70 percent stake in Digital Computer Corp (later DEC).

ARD, which started with $3.6 million in initial capital, not only survived, it prospered. It became the driving force behind DEC, which at its peak employed over 120,000 employees and had revenue in excess of $14 billion. And it helped make Teradyne into the pre-eminent semiconductor testing company of its time. It created jobs, wealth for its entrepreneurs and investors and its own professionals.

In today’s venture capital environment where total assets under management are estimated at $179 billion, invoking ARD may be a little too retro. Can one really turn back the clock? But ARD’s development model – bite-sized partnerships rather than billion-dollar megafunds; venture capitalists as true business partners not simply capital providers; performance-based rewards instead of fat up-front management fees (that forces everyone to have skin in the game) – may well become the inspiration for a new revival.