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May 4, 2006
These Investors are Crazy
Ils sont fous ces romains.The following bit of sanity is from an E&Y interview with Doug Leone of Sequoia Capital:
-- Obelix, in Asterix the Legionary
Leone: ...For some reason, there appears to be an insatiable appetite by limited partners to invest in a category (venture capital) that cannot sustain even a fraction of the capital currently within it. It is the craziest thing that LPs are willing to invest so much in a category that has yielded so little and from so few.
E&Y: Why is it crazy that LPs are willing to invest so much in venture capital?
Leone: The returns have been miserable. If you take away a couple of exits, such as Google and MySpace, there haven't been meaningful returns generated. There are [venture] firms that have never generated a positive return or have not even returned capital in 10 years that are raising money successfully. And that surprises the heck out of me. People talk about the top quartile -- its not about the top quartile, it's barely about the top decile, or even a smaller subset than that.
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is there a link to the interview?
Brian -- Sadly, I don't believe there is. It is, I think, a document for E&Y clients only.
See link below.
http://www.ey.com/global/content.nsf/International/SGM_-_Venture_Capital_Insight_Report_2006
Doug Leone interview is on page 24.
... so if you're Doug and in the VC biz, was that just a moment of blatant honesty, or were the comments strategic in trying to rein in LP investments in competing firms? (or both?)
i tend to think he's correct, however Sequoia is probably one of the few VC firms out there that could get away with saying that & not have [too much] negative reaction / impact from its own LPs.
on a related note, i wonder if the only people really making money in venture these days are:
- a few top VCs & their LPs who get top dealflow (Sequoia, KP, DFJ, a few others)
- other VCs, but only on the mgmt fees (& not their LPs)
- angels who are prudent & early
- entrepreneurs with a track record, every 1-out-of-3 times
i responded to a post on Allen Morgan's blog about 2-3 months ago that seemed to have a very defensive posture on venture returns (quite in contrast to Doug's comments above), where i disagreed pretty strongly with his "venture will still do alright, just u wait" thesis. that might be narrowly true for the biggest & best VCs, but i wonder if the interests of the VCs and their LPs are well aligned these days. note: 2% mgmt fees on $300-500M+ funds can keep VCs pretty phat & happy, while their LPs wait 5-10 years to find out they got crappy returns that underperformed.
in the future, i could see a more competitive field for venture LP agreements where mgmt fees are negotiated down to 0.5-1% (or even a flat rate fee, perhaps?), with more aggressive carry + hurdles at >30%. i know if i were an LP, i'd be asking for something like that.
for reference, allen's post & my comment on the changing market for VCs:
http://allensblog.typepad.com/allens_blog/2006/01/keep_the_faith.html#c14110361
- dave mcclure
With such an overhang - and so much money going into the VC firms - they really are stingy parting with it.