There’s no reason to panic more about VC fund performance — yet
In the end Year, the venture industry has had a difficult time. Many feared that the bull market had pushed prices up to unsustainable levels and that the startup windfall would lead to rounds and cash burn, negatively impacting VC fund performance. But before SVB collapsed, it was doing relatively well.
At least according to a report from the University of California Endowment, the opposite appears to be true. But because this report only looked at funds that went out in 2018 or later—those that haven’t yet reached the critical J-curve—calling these funds “underperforming” doesn’t tell the whole story, because the numbers don’t. The life cycle of the fund is considered.
Let’s break it down. Most fund life cycles are about 10 years, but they don’t start making money right away – by design. A fund typically invests its capital for three to five years, allowing it to “underperform”. Once the fund is deployed, it hits that “J-curve” and begins to see the value of the assets in the fund rise dramatically as they appreciate.
There are ways to obfuscate this timeline: VC firms can sometimes back a relatively early-stage company and exit the investment within 12 months. But 2021 was not normal. Except for the last two years, what’s happening at Sequoia would be completely normal in a healthy market.
So how did most venture funds fare? Really Performing? Data shows that venture funds in general have been doing well, although they have not been immune to market pressures.
A recent PitchBook report looked at the financial performance of all VC funds at all stages, regardless of maturity. The report shows that the rolling one-year IRR was 2.8%, the lowest since Q4 2016, which is not particularly bad for a venture.