Venture Capital: Fred rules but his 3x rule is too optimistic! ?


Fred Wilson’s got a fascinating post about his history of investments over at Union Square Ventures.   Of course he’s got every reason to post his results, which appear to be exceptional although he has left out a key factor in his little analysis, which is time.  I note over there:

Fred, these are impressive results and to my understanding much better than average VC returns, which are negative, right? Don Dodge posted min-analysis some time ago where he wound up concluding there was a lot more VC failure than is normally thought.

There are elite guys like you and Jeff Clavier who “beat the averages”, but isn’t “making money” with startups an unrealistic expectation, since those VCs and companies that succeed are still around to talk, but those who fail are not blogging about the burgers they now flip to pay the bills?

I’m also noting that without “time” as a factor the return is not meaningful. 3x is easy….if you use a 15 year horizon!

At a very modest annual return of 7.33% one would expect to triple an investment in 15 years.     A 10% return will leave you with 4.5x your initial investment in that same time frame.    More dramatically, if time is not a factor then I’m happy to guarantee you a return of, say, a million percent.  It’ll just take a while.

This isn’t to suggest Fred isn’t a great investor because I think he is the exception to the normal rule in Venture Capital, which are low returns.   After I wrote about Don Dodge’s suggestion that average VC returns appear to be negative  Jeff Clavier also suggested in a blog comment here that only the top 25% of VC firms are averaging positive returns, and this really shook up my understanding of things.

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About JoeDuck

Internet Travel Guy, Father of 2, small town Oregon life. BS Botany from UW Madison Wisconsin, MS Social Sciences from Southern Oregon. Top interests outside of my family's well being are: Internet Technology, Online Travel, Globalization, China, Table Tennis, Real Estate, The Singularity.
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6 Responses to Venture Capital: Fred rules but his 3x rule is too optimistic! ?

  1. Don Dodge says:

    Joe, I think all of us are right. Fred Wilson and Jeff Clavier are in the top quartile and doing very well.

    I agree that the top quartile of VC are making most of the money. The bottom two quartiles are definitely losing money.

    The “average” VC is in a negative position.

    You are absolutely correct that time is an important variable in calculating returns, specifically an IRR.

    In fact, the reason there is so much confusion around VC returns is because many VCs just stretch the time horizon as far as necessary, across funds, to show a positive overall return.

    VC investing is a VERY risky business. The returns are enormous if they select good companies and get lucky.

    Don Dodge

  2. FoolsGold says:

    Return, as with anything else, is often an accounting entry. Sometimes the initial investment with a Venture Capital firm is money that is simply being spread around on a “do something” with it basis. By spreading it around there is a greater chance that something good will come of it since puting it to work in a low-risk environment is viewed as a waste of time and money. Sort of like betting on long shots at the racetrack because betting on the favorite is viewed as a wasted effort for such a paltry return.

  3. JoeDuck says:

    Thx Don – I’m very glad you posted because this sort of closes the circle for me with one interesting aspect of this remaining: Is there any way to predict in 2007 the top 25% VCs for 2022? Excluding Jeff and Fred, I’m thinking it would be hard to do.

  4. Jeff Clavier says:

    I certainly appreciate being associated with the top category, but it is way too early IMHO ;-). Financial performance and consistency are really measured over a “long” period of time, generally across funds. The life of a typical fund is 10 years, so this is the time horizon that you will be using as a reference in most calculations.
    I have only been investing in Consumer Internet for 3 1/2 years, and despite my 5 exits, it is only the beginning – especially with the new fund I have launched a few months ago.

  5. JoeDuck says:

    Thanks Jeff for the excellent points. I’ve heard you speak and have read about some of your excellent investment history so I think it’s appropriate to keep you in the elite category – keep up the good work.

  6. Pingback: Venture math fun from Fred’s fund « Joe Duck

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