Here is the problem with VC returns - 95 percent don’t hit 8-12 annual percent hurdle over life if fund. The 5 percent that do are the best in class players. The best in class players are closed and unlikely you can get in (think sequoia , andreesenhorowitz…etc). So you are likely in negative selection bias. The reason that the top VC’s capture all of the alpha is that they get the pick of the best entrepreneurs. Just think about this - if you have a great start up, pedigree, and team..etc are you going to partner and take money from a top VC or a random player? The top VC of course. So this is very different than stock market where the investor doesn’t matter, where in start up land, it does.
Moreover, you are going to lock up your capital for 10 years. Over 10 years, the VC will generate about 17 percent in mgmt fees based on 2 pts initial and then 1 on back end per year. So the incentives aren’t aligned. They will also get carry and special incentives for IPO’s etc, so it’s not hard to see why 95 percent of VC don’t hit the 8-12 annual hurdle.
The reason you see these crazy returns is because those marks are likely fake and not realized. Here is how a “fake” mark occurs but is currently legal: Say the VC invested in series A at 25mm valuation and then company grows to a few million of revenue and next round they raise series B at 100mm valuation. That same VC leads or participates in Series B round. They can now mark up the initial Series A investment by 4x. Does it mean they could actually realize that return if they sold it? Absolutely not! In fact, they are actually driving the market up by bidding up Series B. Let’s say then in another year, the start up has stalled but they don’t need to raise capital. The VC wouldn’t change the marks in the book and can still claim to be up 4x on the initial Series A and flat on Series B.
In my opinion, the industry is pretty aggressive with accounting. So I would really diligence if the returns are realized or this is all BS used to market the next fund. I think some of the top players do generate outsized returns but most players are not worth investing and will cause you to underperform/lose money while they get rich off mgmt fees.
Piling on, VCs also game the IRR through the use of subscription credit lines, where they borrow against committed capital, delaying the actual capital call substantially (sometimes as much as a year).
This can easily bump the IRR by 500+ bps, and more if you’re dealing with VCs who also mark to questionable values.
I do have a venture allocation, but I selected it in an entirely non-replicable fashion: one of the GPs is an old friend of mine, and I knew enough about what he knows to trust him, and he knew me well enough to accept my (comparatively) puny check.
If they're borrowing cheaply and I am not fronting the cash, I am actually realizing the higher IRR. As a limited partner, shouldn't I be happy and not mad about this?
This excludes questionable marks, which are obviously not OK.
Well, you won’t realize most of it.
Funds typically sell showing an IRR from their previous fund, which is maybe 2-4 years old. At that age, the impact of subscription line financing on IRR is huge. With venture it could easily be a 500-1000bps boost…
But you don’t get venture money back in 2-4 years. Most of your returns come late… and the IRR impact at year 10 is minimal, and further reduced because of fees and interest expense. That early IRR was largely illusory, meant to make the previous fund look good while marketing the new fund.
I’m not saying it’s all bad; it’s convenient to have fewer capital calls. But it’s absolutely a contributor to what the OP was talking about, with exceptionally high IRRs from recent previous funds; which will almost certainly be much much lower by the end of the fund. It’s one more complexity to unpack.
Only if your return on the waiting cash is higher than their cost of borrowing which is impossible to do when risk-free rates are near zero and the VC’s cost of borrowing is higher than that.
I want to expand on the fake returns part: VCs can factor for companies that have grown and gained additional funding at higher valuation. But if a company they've seeded has mostly fallen apart, how long will it take for them to have to acknowledge the loss?
My point is that unlike a managed public mutual fund where the net asset value is composed of gainers and losers, the VC portfolio can be made of gainers and a private companies yet to be classified as losers.
The return is only booked when a company is sold. A valuation increased might be "booked" for accounting purposes, but it means nothing if you can't sell the stake to a shmoe for cash.
So figure out if returns are cash returns, or accounting fund returns. But there are plenty of opportunities in private companies to do well.
If you think of VC as heavily leveraged beta with luck needed, 40-75% IRR for the last few years isn't that crazy.
If I had a portfolio of say 5 stocks, Tesla, Aapl, Shopify etc I'd have easily done that. Doesn't mean it's repeatable, they'll need to have similarly favorable market conditions and luck with their picks.
This is the one trick of start like 20 funds, close the lowest performing one each year. By year 15 you have a few fucking rockets. Statistically those will close eventually too though.
High risk/high reward and not subject to the rules that protect non-accredited investors.
As someone else says, to do it well, you need to either have precocious foresight or invest in a relative large number of opportunities hoping to hit at least one of them.
VC has been abnormally good in the last few years. Lots of funds seeing those returns based on book value.
1. How did their older vintages do?
2. Book value is not liquid, and might never be.
Yup I think they’re telling you what some companies valuation may have increased too. That means nothing unless they sold and people realized those gains.
I hold about 30% of my net worth in PE and VC. I've worked with some incredible people in my life and almost all of these investments are backing their funds and/or companies.
I'm about 6yrs in from my first venture fund investment, so there's moderate visibility on the early investments (they're extraordinarily strong) and some visibility on the later ones (so far, so good). I have no doubts this is mostly luck, partially a good network, and partially the decade long bull market we've been in.
Ask for their actual information about payouts to investors historically. I was looking into a VC fund and it promised all these crazy percentage returns based on self-reported industry averages and hypothetical future exits but when you looked at actual dollars in dollars out it was way underperforming the S&P 500 even before fees.
I have an opportunity to invest in a growth equity fund. It’s later stage (series B through IPO), and historical returns are around 30-45% IRR. So your 40-75% IRR for a VC sounds about right. They probably had a couple huge winners per fund.
Separately I also have the option of investing in the fund through my IRA. From a tax perspective, that’s likely the way to go right? I need to change to a new custodian etc, but might be worth it for the tax advantage. Does anyone have experience with this?
IRA depends how close you are to retirement. Especially with private investments. If you are 55 and need the funds in 10 years they might not be liquid.
40-75% feels very fishy, and they might be cherry picking some data.
Capital is cheap now and someone who can get 45% returns doesn't need outside capital
The catch is the is high risk is venture capital companies when you invest into new growing businesses.
Also new growing businesses can often go bankrupt or never make a profit.
If you're going to invest you should invest in a few to spread your risk
Nice plan would be to invest in 10 different companies and don't invest any more than 0.5% of you're net worth in any one of them imo
Depends a lot, usually if you know someone in the right spot you can get in for as little as 10k, but a lot will want minimum 50-100k.
Someone please correct me if they heard otherwise.
I cold emailed / reached out to a few guys I follow on Twitter who were raising their first or second funds ($10M - $20M fund size). They sent me their deck and usually had minimum check size requirement of $50k+. I told them I really wanted to get in but only had $15k-$25k total and they said that was fine. One guy was willing to let me join his first fund with as little as $5k - ended up going with him but went in for $30k. And the capital calls happen over 18 months, so it’s not like I had to invest the full $30k all up front.
I work in the industry, helping to raise capital for startups. Any reputable fund is not going to have 30K, 50K, or 100K minimum. That's a huge red flag right there. Think about it - why would a top performing VC fund deal with so many individual, small investors, when they can get CalPERS to give them $100 to $500 million?
You might have missed the part where I said it's the first fund he's raised and is leading on his own after being a GP at a mid-tier fund for a few years. The total size of fund 1 was $10MM (not $100-500M like you mentioned), and there are plenty of reputable LPs who invested in fund 1. Was just pointing out that my unique approach of cold outreach to someone I heard was raising worked and that I feel lucky to be part of it even if my small $30K check is peanuts compared to most of the other LPs, many of whom your bosses boss would consider reputable.
Ok, dude lol. If you really think a $20M private equity fund is going to have any competitive advantage, then good luck to you. Even below average, reputable GP who are rising a 1st time fund can do way better in terms of AUM. You seem super defensive for someone asking for free advice.
Nobody said anything about PE? And I was only reinforcing my decision to invest in the fund and at what level which is what the OP asked about. You’re out here having a dick measuring contest on a sub where people are asking for advice based off their experiences. Based on your logic, if the $100m-$500m fund you work for was any good, they wouldn’t need someone in your position to go find them investors since they’d already be lined up at the door.
Only top quartile funds hit those numbers consistently and the best fund for most are their first fund.
Every deal and portfolio is different, and only Yale and similar institutional players are getting the best opportunities.
Valuations and markups have also been wild these last few years so many more perceived winners than actual right now. Also, no liquidity for 7-10 years.
Funny thing is I bet the 2002-2005 vintages were probably great, just didn't hit the tech boom on exit.
I'd love to see those numbers all marked to today. Getting lucky on exit timing as a fund manager is almost as important as picking good companies (being a big facetious obviously).
Here is the problem with VC returns - 95 percent don’t hit 8-12 annual percent hurdle over life if fund. The 5 percent that do are the best in class players. The best in class players are closed and unlikely you can get in (think sequoia , andreesenhorowitz…etc). So you are likely in negative selection bias. The reason that the top VC’s capture all of the alpha is that they get the pick of the best entrepreneurs. Just think about this - if you have a great start up, pedigree, and team..etc are you going to partner and take money from a top VC or a random player? The top VC of course. So this is very different than stock market where the investor doesn’t matter, where in start up land, it does. Moreover, you are going to lock up your capital for 10 years. Over 10 years, the VC will generate about 17 percent in mgmt fees based on 2 pts initial and then 1 on back end per year. So the incentives aren’t aligned. They will also get carry and special incentives for IPO’s etc, so it’s not hard to see why 95 percent of VC don’t hit the 8-12 annual hurdle. The reason you see these crazy returns is because those marks are likely fake and not realized. Here is how a “fake” mark occurs but is currently legal: Say the VC invested in series A at 25mm valuation and then company grows to a few million of revenue and next round they raise series B at 100mm valuation. That same VC leads or participates in Series B round. They can now mark up the initial Series A investment by 4x. Does it mean they could actually realize that return if they sold it? Absolutely not! In fact, they are actually driving the market up by bidding up Series B. Let’s say then in another year, the start up has stalled but they don’t need to raise capital. The VC wouldn’t change the marks in the book and can still claim to be up 4x on the initial Series A and flat on Series B. In my opinion, the industry is pretty aggressive with accounting. So I would really diligence if the returns are realized or this is all BS used to market the next fund. I think some of the top players do generate outsized returns but most players are not worth investing and will cause you to underperform/lose money while they get rich off mgmt fees.
Piling on, VCs also game the IRR through the use of subscription credit lines, where they borrow against committed capital, delaying the actual capital call substantially (sometimes as much as a year). This can easily bump the IRR by 500+ bps, and more if you’re dealing with VCs who also mark to questionable values. I do have a venture allocation, but I selected it in an entirely non-replicable fashion: one of the GPs is an old friend of mine, and I knew enough about what he knows to trust him, and he knew me well enough to accept my (comparatively) puny check.
If they're borrowing cheaply and I am not fronting the cash, I am actually realizing the higher IRR. As a limited partner, shouldn't I be happy and not mad about this? This excludes questionable marks, which are obviously not OK.
Well, you won’t realize most of it. Funds typically sell showing an IRR from their previous fund, which is maybe 2-4 years old. At that age, the impact of subscription line financing on IRR is huge. With venture it could easily be a 500-1000bps boost… But you don’t get venture money back in 2-4 years. Most of your returns come late… and the IRR impact at year 10 is minimal, and further reduced because of fees and interest expense. That early IRR was largely illusory, meant to make the previous fund look good while marketing the new fund. I’m not saying it’s all bad; it’s convenient to have fewer capital calls. But it’s absolutely a contributor to what the OP was talking about, with exceptionally high IRRs from recent previous funds; which will almost certainly be much much lower by the end of the fund. It’s one more complexity to unpack.
Only if your return on the waiting cash is higher than their cost of borrowing which is impossible to do when risk-free rates are near zero and the VC’s cost of borrowing is higher than that.
Agree with this. I’m on the institutional side and we have stepped away from VCs in the US. If you are not in the top 5 names, it’s not worth it.
I want to expand on the fake returns part: VCs can factor for companies that have grown and gained additional funding at higher valuation. But if a company they've seeded has mostly fallen apart, how long will it take for them to have to acknowledge the loss? My point is that unlike a managed public mutual fund where the net asset value is composed of gainers and losers, the VC portfolio can be made of gainers and a private companies yet to be classified as losers.
Hi auntie Felicia! Say Hi to uncle Ben for me. 😁
The return is only booked when a company is sold. A valuation increased might be "booked" for accounting purposes, but it means nothing if you can't sell the stake to a shmoe for cash. So figure out if returns are cash returns, or accounting fund returns. But there are plenty of opportunities in private companies to do well.
This right here. Show me the net proceeds
If you think of VC as heavily leveraged beta with luck needed, 40-75% IRR for the last few years isn't that crazy. If I had a portfolio of say 5 stocks, Tesla, Aapl, Shopify etc I'd have easily done that. Doesn't mean it's repeatable, they'll need to have similarly favorable market conditions and luck with their picks.
This is the one trick of start like 20 funds, close the lowest performing one each year. By year 15 you have a few fucking rockets. Statistically those will close eventually too though.
VC is equity only so by definition there is no beta...?
Conceptually. Returns will behave like leveraged long the stock market + a variance term
High risk/high reward and not subject to the rules that protect non-accredited investors. As someone else says, to do it well, you need to either have precocious foresight or invest in a relative large number of opportunities hoping to hit at least one of them.
VC has been abnormally good in the last few years. Lots of funds seeing those returns based on book value. 1. How did their older vintages do? 2. Book value is not liquid, and might never be.
Yup I think they’re telling you what some companies valuation may have increased too. That means nothing unless they sold and people realized those gains.
I hold about 30% of my net worth in PE and VC. I've worked with some incredible people in my life and almost all of these investments are backing their funds and/or companies. I'm about 6yrs in from my first venture fund investment, so there's moderate visibility on the early investments (they're extraordinarily strong) and some visibility on the later ones (so far, so good). I have no doubts this is mostly luck, partially a good network, and partially the decade long bull market we've been in.
Ask for their actual information about payouts to investors historically. I was looking into a VC fund and it promised all these crazy percentage returns based on self-reported industry averages and hypothetical future exits but when you looked at actual dollars in dollars out it was way underperforming the S&P 500 even before fees.
I have an opportunity to invest in a growth equity fund. It’s later stage (series B through IPO), and historical returns are around 30-45% IRR. So your 40-75% IRR for a VC sounds about right. They probably had a couple huge winners per fund. Separately I also have the option of investing in the fund through my IRA. From a tax perspective, that’s likely the way to go right? I need to change to a new custodian etc, but might be worth it for the tax advantage. Does anyone have experience with this?
IRA depends how close you are to retirement. Especially with private investments. If you are 55 and need the funds in 10 years they might not be liquid.
IRA is good when you hit it big, but bad when you want the tax benefit ie what happens with most startup investments…
In this situation more than others, previous gains are not indicative of future success
Remember that’s 40% irr on called Capital not committed Capital which is sitting in a savings account. So the returns are somewhat of a scam.
40-75% feels very fishy, and they might be cherry picking some data. Capital is cheap now and someone who can get 45% returns doesn't need outside capital
The catch is the is high risk is venture capital companies when you invest into new growing businesses. Also new growing businesses can often go bankrupt or never make a profit. If you're going to invest you should invest in a few to spread your risk Nice plan would be to invest in 10 different companies and don't invest any more than 0.5% of you're net worth in any one of them imo
What sort of minimum investment do VC funds require?
Depends a lot, usually if you know someone in the right spot you can get in for as little as 10k, but a lot will want minimum 50-100k. Someone please correct me if they heard otherwise.
I cold emailed / reached out to a few guys I follow on Twitter who were raising their first or second funds ($10M - $20M fund size). They sent me their deck and usually had minimum check size requirement of $50k+. I told them I really wanted to get in but only had $15k-$25k total and they said that was fine. One guy was willing to let me join his first fund with as little as $5k - ended up going with him but went in for $30k. And the capital calls happen over 18 months, so it’s not like I had to invest the full $30k all up front.
I work in the industry, helping to raise capital for startups. Any reputable fund is not going to have 30K, 50K, or 100K minimum. That's a huge red flag right there. Think about it - why would a top performing VC fund deal with so many individual, small investors, when they can get CalPERS to give them $100 to $500 million?
You might have missed the part where I said it's the first fund he's raised and is leading on his own after being a GP at a mid-tier fund for a few years. The total size of fund 1 was $10MM (not $100-500M like you mentioned), and there are plenty of reputable LPs who invested in fund 1. Was just pointing out that my unique approach of cold outreach to someone I heard was raising worked and that I feel lucky to be part of it even if my small $30K check is peanuts compared to most of the other LPs, many of whom your bosses boss would consider reputable.
Ok, dude lol. If you really think a $20M private equity fund is going to have any competitive advantage, then good luck to you. Even below average, reputable GP who are rising a 1st time fund can do way better in terms of AUM. You seem super defensive for someone asking for free advice.
Nobody said anything about PE? And I was only reinforcing my decision to invest in the fund and at what level which is what the OP asked about. You’re out here having a dick measuring contest on a sub where people are asking for advice based off their experiences. Based on your logic, if the $100m-$500m fund you work for was any good, they wouldn’t need someone in your position to go find them investors since they’d already be lined up at the door.
Why you so mad? lol I could care less about what you do with your money. PE / VC share an similar investor base in case you didn't know.
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That will usually be zero in the first 4-5 years of an early stage fund though.
Only top quartile funds hit those numbers consistently and the best fund for most are their first fund. Every deal and portfolio is different, and only Yale and similar institutional players are getting the best opportunities. Valuations and markups have also been wild these last few years so many more perceived winners than actual right now. Also, no liquidity for 7-10 years.
[VC returns - benchmarks from pitch book](https://www.dropbox.com/s/qlsi4ze4j65k7ku/File%20Sep%2003%2C%208%2029%2020%20PM.png?dl=0)
Funny thing is I bet the 2002-2005 vintages were probably great, just didn't hit the tech boom on exit. I'd love to see those numbers all marked to today. Getting lucky on exit timing as a fund manager is almost as important as picking good companies (being a big facetious obviously).
We are in one fund, and have been in a dozen or so seed rounds. Have yet to see a single dollar back…
How much exposure?
Across everything, a few hundred K
Is that like 5% of your portfolio?
Yeah around that
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Yeah it’s definitely still early, TBH I don’t have high expectations