The 10-year return figures from Cambridge Associates are probably the best way to measure the performance of a long-term asset class like venture capital. As the profits from the dotcom bubble start to recede beyond that 10-year horizon (the Nasdaq peak was March 2000), the true picture of the industry’s performance starts to come into better focus.
The latest quarterly figures today (for the period up to 30 September 2009) revealed a slump in the 10-year return to 8.4 per cent, down from 40.2 per cent a year before when the full bubble effect was still in the numbers. Bad, certainly, but still respectable: the Nasdaq composite lost 2.5 per cent annually over the same period.
But the really bad news for the venture capitalists is still to come.
It turns out that they were still reporting higher valuations for their funds for two quarters after the Nasdaq peaked. According to Rik Nuenighoff at Cambridge Associates, as late as the third quarter of 2000 venture funds claimed a quarterly return of 12 per cent, while the Nasdaq declined 7.4 per cent.
It could be, he says, that this is because of delayed pay-outs of realised gains – but it also looks like VCs were still blithely marking up their unrealised investments while the markets were sinking around them.
The day of reckoning has to come eventually. By the end of 2010 the 10-year VC return figure will almost certainly turn negative for the first time ever (the current 9-year figure is -6 per cent.) At that point there is a good chance it will sink below the return on the Nasdaq.
Of course, a vibrant IPO market might still help to ease the pain. But with the markets now taking a pause after last year’s solid run, it’s hard to see how this will be enough to dig VCs out of the hole in time.
