more discussion and analysis:
http://www.findarticles.com/p/articl..._15859254/pg_3
Despite these achievements, even the most successful venture capital firms and venture capitalists have their share of failures. For example, in addition to its investments in Compaq Computer and Lotus Development, Sevin Rosen invested $400,000 in Osborne Computer Company, which later went bankrupt.
Franklin P. Johnson, who manages Asset Management Co., a venture capital fund based in Palo Alto, California with approximately $100 million in paid-in capital, has realized tremendous returns from his early stage investments in Amgen, Inc., a biotechnology firm based in Thousand Oaks, California, and Tandem Computer, of Cupertino, California. However, even for one of Silicon Valley's most successful venture capitalists, there are significant risks that go along with the high potential returns of early stage investments. This is evidenced by his investment in VisiCorp, a software company based in San Jose, California that created the VisiCalc spreadsheet. Interestingly, it was VisiCorp (or Daniel Bricklin, the founder of VisiCorp--who has since taken on the role of venture capitalist), and not Lotus, that pioneered the concept of the spreadsheet, which shows that being first is not necessarily the surefire road to success.
Similarly, Fred Adler's investments in Data General, Daisy Systems, Life Technologies, and Advanced Technology Labs have made him a "living legend" in venture capital circles. However, he was less successful in his investment in Tenet, a West Coast computer firm that ran into a major recession shortly after it started up in 1969, and Cogar Corp., an upstate New York semiconductor memory systems company that never produced anything but publicity.
Even the best venture capital firms have had their share of failures. Osborne Computer, Fortune Systems, Pizza Time Theatre, Victor Technologies, and Diasonics all had experienced, intelligent venture capitalists supporting them. All turned out to be losers for the firms that invested in them. The better venture capital firms try to limit their failures to one in ten--or, at worst, two in ten. Their philosophy is that they cannot afford to have five or six losses that will be offset by one superstar performer.
Unfortunately, the investments in DEC, Lotus Development, Compaq Computer, Apple Computer, and Syntex are not at all indicative of venture capital portfolio performance as a whole. For example, even with DEC in its portfolio, ARD's rate of return from 19461966 was only 14 percent.
Some researchers have reported extremely positive results of the performance of venture capital firms. Martin and Petty (1983) reported average rates of return of 27 percent for publicly traded venture capital companies from 1974-1979. However, these researchers studied the performance of the stock prices of the companies, rather than the performance of the ventures in which these firms had committed capital. The relationship of these two measures of performance is often misleading. Notwithstanding, Ibbotson and Brinson (1987), using a methodology similar to that of Martin and Petty, reported that the average rate of return of publicly held venture capital companies from 1959-1985 was only 16 percent.
What Returns Have Been Realized by Venture Capital Firms?
Aside from ARD, studies have been made of the rates of return of the portfolios of other respected privately and publicly held venture capital firms and small business investment corporations (SBICs). The rates of return for a sample of such investments over the 1960s and 1970s, after deducting management fees, ranged from approximately 12 percent to less than 20 percent.
More recently, the returns on venture capital investments have been quite variable, both on an individual year basis and on a long-term (10-15 year) basis. They have been affected positively by the length of the period, the stage (early or late) of the funding, and the pricing of the deal. Nevertheless, over the last 20 years, industrywide returns have rarely been better than 20 percent in any given year.
Individual year returns. Between the late 1970s and the early 1980s, venture investments reached their all-time individual year highs in terms of annual returns for their investors--in excess of 30 percent. In the mid-1980s, returns were slightly above 20 percent per year. More recently, portfolio returns have declined further to their current level of somewhere between less than 10 percent to as high as 15 to 20 percent for a given year, depending upon which data you believe.
William Bygrave and his colleagues (1988) recently analyzed the performance of venture capital funds from 1979 to 1985 by measuring their internal rate of return (IRR). They found that although the average IRR for one year was more than 30 percent in 1980, it was less than 10 percent for one year by the end of 1985, thereby suggesting a decline in the level of performance of the funds. These results were consistent with a recent study reported in Forbes (Jereski 1988).
Long-term returns. How have venture capital portfolios performed over the long term? A comparative analysis of long-term portfolio performance, reported in Venture (1985), showed annual compounded returns for venture capital firms for the period from the early 1970s to the mid 1980s of anywhere from 20 percent to 25 percent. Other analyses (Chiampou and Kallett 1989; Schilit 1993) have reported annual returns of around 20 percent for the period from the late 1970s to the late 1980s--slightly less than the results reported in Venture.
The reader should be cautioned, however, that self-reports of the financial performance of privately held companies in a portfolio managed by privately held venture capital firms tend to contain discrepancies in the results from one study to another. The data just cited are meant to serve as approximate general ranges, rather than as absolute comparative measures of performance.
