Venture returns: good, bad, ugly

More demand than supply among potential investors

By: Hui-yong Yu
Monday, December 13, 2004

Returns among U.S. venture funds vary as widely as the funds themselves, ranging from huge gains to big losses.

"The disparity between the top tier and the bottom tier is dramatic," said Bruce Madding, chief financial officer of the Kaiser Family Foundation. "This is a home-run business, not a business that has consistency of returns."

On average, the bottom half of U.S. venture capital funds started from 1990 to 2003 lost money, according to research by Boston-based Cambridge Associates LLC, an adviser to institutional investors. But the top quarter of managers posted an annual mean return of 81.4 percent after fees through March 31.

Results fell off sharply for the second-best 25 percent, which posted gains of 18.8 percent, according to Cambridge Associates data presented at a recent venture capital conference in San Francisco.

The third quartile lost 7.5 percent, and the bottom quarter had a decline of 21.2 percent.

Institutions such as pension funds and colleges are increasing their bets on venture capital and buyout funds to get higher returns than from stocks and bonds.

Still, it's almost impossible for new investors to get into top-performing venture funds such as Sequoia Capital, partly because venture firms are raising less money than they did for previous funds.

In addition, several venture capital firms are shunning public pension funds for fear that details of their business will be disclosed.

Although fund raising is down from its peak in 2000, it has picked up recently. Venture capital firms raised $10.3 billion in new funds through October, 19 percent more than in all of 2003, according to research firm VentureOne.

"If we could get into more top-performing funds, we would," Margot Wirth, investment officer in private equity for the California State Teachers Retirement System, said at the conference. The Sacramento-based pension fund has about $10 billion invested in venture capital and buyout funds.

The Cambridge data suggest that venture capital might not deliver the returns many expect, investors said.

"If you want to be in venture, you have to be in the top quartile," said Georganne Perkins, director of private equity at Stanford University, who provided the Cambridge Associates figures to the conference.