Venture Capital Returns

1 Steven N. Kaplan

What do Venture Capitalists do?

How Well Have They Done?

Steve Kaplan University of Chicago Booth School of Business

2 Steven N. Kaplan

Overview ■  Two parts to the talk:

–  Performance: » How have VC funds performed?

■  How does VC compare to PE? » How will VC perform going forward?

–  What do VCs do?

3 Steven N. Kaplan

How have VC funds performed?

■  Fundraising? ■  Performance?

4 Steven N. Kaplan

Fundraising (U.S.)

0

10

20

30

40

50

60

70

80

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

$ B

illio

ns

Commitments to U.S. Venture Capital Partnerships 1980 - 2015 (in $ billions)

Source: Private Equity Analysis, Steven N. Kaplan

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Fundraising (U.S.) as % of market

0.000%

0.050%

0.100%

0.150%

0.200%

0.250%

0.300%

0.350%

0.400%

0.450%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Commitments to U.S. VC Partnerships as Fraction of Stock Market Capitalization 1980 - 2015

Source: Private Equity Analyst, Steven N. Kaplan

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Fundraising

■  Commitments to VC as a % of overall stock market has been much more stable than is commonly appreciated. –  Usually between 0.10% and 0.20% of total stock market. –  Big outliers were 1999 to 2001. –  On the low side since 2009.

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What about performance for LPs?

■  How is performance measured? ■  Who measures performance? ■  What has performance been on average? ■  Are there good GPs? ■  Summarize results from

–  Harris, Jenkinson, Kaplan (2014 and 2016) –  Brown, Harris, Jenkinson, Kaplan, Robinson (2016)

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How is Performance Measured?

■  Two industry standards: –  Annualized IRR (net of fees).

–  Multiple of Invested Capital (MIC). »  Total Value Returned / Invested Capital. »  (Distributed Value + Residual Value) / (Capital in Cos. + Fees)

■  Each has its drawbacks.

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■  Each has its drawbacks:

–  Net IRR: »  Absolute (not relative).

■  Does not control for market movements. »  Is sensitive to sequencing of investments.

–  Multiple of Invested Capital: »  Absolute (not relative).

■  Does not control for market movements.


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■  A 3rd method – KS PME (Public Market Equivalent). –  Grow LP inflows / investments at S&P 500 (or other return). –  Grow LP returns / distributions at S&P 500 (or other return). –  Compare value of outflows to inflows. –  If PME > 1, then LPs did better than S&P 500.

» + Does control for the market. » + Not sensitive to investment sequence.

■  Think of PME as a market-adjusted multiple.

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Does anyone use KS PME? Calpers

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Who measures performance?

■  Four commercial databases: –  Burgiss –  Cambridge Associates (CA) –  Pitchbook –  Preqin –  Thomson Venture Economics (VE)

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What about performance?

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-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: Burgiss

U.S. VC IRRs by Vintage Year, 1991 - 2013 Pooled Ave. as of September 2016

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0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: Burgiss

U.S. VC MOICs by Vintage Year, 1991 - 2013 Pooled Ave. as of September 2016

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Question?

■  Have VC funds of vintages 2006 to 2013 beaten the S&P 500?

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: Burgiss

U.S. VC PMEs by Vintage Year, 1991 - 2013 Pooled Ave. as of September 2016

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0.4

0.6

0.8

1.0

1.2

1.4

1.6

1999 2001 2003 2005 2007 2009 2011 2013

Source: Burgiss

U.S. VC PMEs by Vintage Year, 1999 - 2013 Pooled Ave. as of September 2016

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Overall return evidence

■  IRRs, Multiples and PMEs vary substantially across vintage years. –  PMEs well above 1.0 through 1998. –  PMEs below 1.0 1999 to 2002. –  PMEs above 1.0 since 2003.

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Question?

■  How has PE done relative to VC?

■  Have PE funds of vintages 2006 to 2013 beaten the S&P 500?

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PE vs. VC performance? PMEs

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1999 2001 2003 2005 2007 2009 2011 2013

Source: Burgiss

U.S. VC and PE PMEs by Vintage Year, 1999 - 2013 Pooled Ave. as of September 2016

VC PME PE PME

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PE vs. VC

■  How has PE done relative to VC? –  For 1999 to 2005 vintages, PE did much better. –  For post-2006 vintages, VC has done better.

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What will happen going forward? Returns?

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Future Performance and Fundraising:

■  Performance in VC significantly negatively related to fundraising. –  Even more so. –  IRR in Vintage Year =

»  43% - 75 x VC inflows in current and prior year as % of stock mkt. –  Multiple in Vintage Year =

»  4.39 - 626 x VC inflows in current and prior year as % of stock mkt. –  PME in Vintage Year =

»  2.48 - 279 x VC inflows in current and prior year as % of stock mkt. –  On average VC inflows = 0.135% of stock market. (2 years 0.27%).

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Vintage Year PME vs. Capital Committed

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Fundraising (U.S.) as % of market

0.000%

0.050%

0.100%

0.150%

0.200%

0.250%

0.300%

0.350%

0.400%

0.450%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Commitments to U.S. VC Partnerships as Fraction of Stock Market Capitalization 1980 - 2015

Source: Private Equity Analyst, Steven N. Kaplan

27 Steven N. Kaplan

What will the future hold?

■  Despite all the attention to start-ups / VC, commitments to stock market value not particularly high relative to historical means.

■  Will probably be higher this year, but nowhere near tech boom. –  Commitments to PE are at historically high levels.

■  Accordingly, still feel better about VC than about PE.

61 Steven N. Kaplan

Steven N. Kaplan Neubauer Family Distinguished Service Professor

Entrepreneurship and Finance [email protected]