No reason to panic more over VC fund performance — yet
It seems that the venture industry is having a tough time, but before SVB failed it was going relatively well. It is possible that this downturn could have been prevented if more people were aware of the risks involved in large investments into early stage startups.
In recent years, many people have called the University of California’s endowment underperforming. This is based on looking at funds with vintages of 2018 or later, which haven’t hit the critical J-curve yet. However, when lifecycle is taken into account, this seems to not be the case.
The reason a fund’s initial performance drops is because it is investing its capital for around three to five years. Once the investment has been made, the fund starts seeing a “J-curve” where performance begins to rise sharply. Because of this, most mutual funds only offer returns that fluctuate moderately over time.
Firms like Sequoia Capital have been responsible for some of the biggest exits in Silicon Valley in recent years. It’s no surprise that they would want to invest early and get their return as quickly as possible, but 2021 was significantly outside the norm. In fact, excluding the last two years, what’s been happening at Sequoia would be totally normal in an otherwise healthy market. The reason is that there are a lot more companies trying to raise money these days and most of them will eventually succeed. This means that there are a lot more early-stage deals going on and fewer late-stage investments.
Overall, venture capital was doing just fine during the years that market pressures were at their peak. Many individual firms even reported outperforming the broader market, likely due to their successful track records and deep pockets. Firms that are able to continue investing in high-quality leads and returning solid returns over time will likely maintain an edge over those who cannot keep up.
While the one-year IRR is still low, it is not as low as it has been in the past. This could be a sign that venture capitalists are more discerning when investing in early stage companies, or that many of these companies have hit their stride and are showing good performance.
