Despite the volatility of 2022, VC funds performed better than you think

There’s no reason to panic anymore about the performance of VC funds, yet

about the last year, the venture industry has had a tough time. Many feared that the bull market had driven valuations to unsustainable levels and would lead to a windfall of early bear rounds and cash burns, negatively impacting VC fund performance. But before SVB failed, it was going relatively well.

It might seem that the opposite is true, at least according to a report on the University of California endowment. But since this report only looked at funds with vintages of 2018 or later, which have not yet hit the critical J curve, calling these funds “underperformers” wouldn’t tell the whole story, because the numbers don’t take the cycle into account. bottom life.

Let’s break it down. Most fund life cycles are about 10 years, but they don’t start making money right away, by design. A fund typically invests principal for three to five years, causing its “return” to decline. Once the fund is implemented, it hits that “J-curve” and begins to see its value rise again sharply as the assets in the fund gain in value.

There are ways to disrupt this timeline: VC firms can sometimes back a company at a relatively early stage and exit the investment within 12 months. But 2021 was not normal. Excluding the last two years, what has been happening at Sequoia would be totally normal in a healthy market.

So what were most hedge funds like? in fact running? The data shows that, as a whole, hedge funds, while not immune to market pressures, were doing well.

A recent PitchBook report looked at the performance of VC funds at all stages, regardless of maturity. The report found that the one-year rolling IRR was 2.8%, the lowest since the fourth quarter of 2016, not a particularly bad year for venture firms.

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James D. Brown
James D. Brown
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