Who drives VC returns

Steve Bird at Focus Ventures put out this awesome paper that looks at venture capital returns (hat tip to Will Price for the link). I'm not going to excerpt much of it because you should just go and read the whole thing, it's that interesting.

Something that did catch my attention is that the top 50 venture firms in the industry have consistently delivered the bulk of venture returns. Not totally surprising given that these firms have endured the test of time by successfully going through the virtuous cycle of good deals develops good reputation which attracts more good deals. While it may be enough to explain it off as that simple, it's actually not because with good reputation comes a lot of deal opportunities so picking the good ones becomes an exercise in discipline and good insight. Therefore it's not surprising that quality of fund management is the single greatest driver of venture returns over time.

One data point that did surprise me is that stage of investing had little impact on venture returns. This actually reminds me once again why venture funds have a life of 8-10 years on average, it's all about returns over time. There's all kinds of ways to argue the stage of investing point, but again it comes down to fund management and what their core competencies are, whether they are entrepreneur or finance focused. SAP did some late stage investing during the bubble years (easy money) but we really weren't very active in those deals because what the company needed from their investors was something we just didn't bring... Wall St. expertise. What we did bring to the table was a really valuable brand name and that's why we got into those deals, but the fact remains that they weren't very exciting outside of IRR.

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