Wednesday, January 04, 2006

Personal Equity

Steve Bird of Focus Ventures wrote an interesting paper on what drives venture capital returns.

The paper looks at two investment cycles: the PC era of 1983-1987 and the Internet boom of 1997-2001. In the former era, the top 50 firms represented 13% of the industry and captured 44% of the value created. In the latter era, the top 50 firms represented 4% of the industry and captured 66% of the value created.

The moral of the tale to LPs is that if you cannot get your money in a top firm then don't invest in the asset class.

Click above to get the PDF.


  1. This is an interesting article, but I do have a couple of questions regarding the research. 1st, doesn't focusing soley on IPOs skew results away from other types of liquidity events such as acquisitions? Also, I was surprised to see that investments made between 1992 & 1997 achieved IPO rates of for seed, series A and later stage companies at 23%, 28% and 47% respectively. While I'm happy to admit my general ignorance about where these numbers actually are they do strike me as even when considering the bubble. They certainly are higher than what I remember Nesheim quoting in 'High Tech Start Up.'

    I am curious to get others thoughts on these questions:

    1) Are these IPO rates high and what perecentage of fund returns generally come from IPO, Acquisition and investments that simply become the dreaded life style businesses.

    2) How relevant will data from these eras be in predicting returns over the next investment cycle when it appears that the IPO window will remain small?

  2. Robin Bordoli8:53 AM


    I was initially impressed with Steve Bird's analysis, but as I dug deeper and compared it to a University of Chicago paper I saw that there are a number of problems with his methodolody such as 1) using financings, not funds, as the unit of analysis 2)selectively choosing only 8 years out of a 24 year time series and 3) only using IPO value creation as the key metric, thus ignoring many of the winners and all of the losers

    Click over to see my post on this