The pain from the long dotcom hangover is finally starting to recede into the past, at least when it comes to venture capital returns. About time, too. But it is still far too soon to tell whether historic long-term profits from VC investment will hold up.
The story is told in the chart below. The thick broken line at the bottom shows five-year venture capital returns in the US. As write-offs from the dotcom disaster have receded and profitable exits are being found for the the companies that survived, this line has finally crept back into positive territory (the latest figures were put out today by the NVCA.)
The most encouraging part of this chart is the thin broken line in the middle: despite the boom and bust, 20-year returns from start-up financing have stayed remarkably solid, at around 16 per cent a year.
But will that continue to hold good for the next 20 years? The top line shows how ten-year returns, which had been boosted by the bubble, are sinking back towards the norm. The supply and demand equation in venture financing looks very different than it did back in the mid-1990s, with many more funds and many more investors still scrambling to get in. That surely points, eventually, to long-term returns below the historic mean.
