Allen Wagner March 05, 2014
Pre-1997 venture capital funds vastly outperformed funds from the latter half of the 1990s, according to PitchBook data, as VC firms exited their early-decade investments at the height of the market and later investments busted with the dot-com bubble.
PitchBook’s 1Q 2014 Global PE & VC Benchmarking Report, which released yesterday, mostly takes a look at alternative asset fund vintages from 2001 and 2011, but our fund returns information goes farther back to the early 1990s. And this is where we begin to see some startling numbers. From 2001-2011, the best performing VC vintage by median IRR has been 2009 funds, with a 10.7% IRR. Sure, there has been steady improvement—particularly for newer vintages—from the depths of the early 2000s, but nothing from the last 15 years compares to what VC funds were returning from 1992 to 1996, when every vintage posted a median IRR of more than 12.5%. 1993 and 1995 were particularly impressive years, with both vintages breaking the 30% IRR mark.
The chart above shows IRR medians by vintage for VC funds, and as expected, funds from the first half of the decade saw astronomical returns, while funds from later in the ’90s largely fell flat. Most funds from the late-1990s invested in companies that would later become impossible to sell for a profit as the dot-com bust diminished values across the board, while companies that received VC backing in the early-to-middle part of the decade went public or were acquired before the bubble burst, generating enormous returns for investors. These companies eventually flamed out in the early-2000s like everyone else, but not before VC firms distributed capital back to LPs.
You can generally see this play out by picking a top-performing fund at random. For the purposes of this article, I went with Kleiner Perkins Caufield & Byers VII, a 1994 vintage fund that finished its run with a 124.6% IRR, according to PitchBook data. The fund invested in companies many people today probably wouldn’t recognize—save for perhaps Drugstore.com and Netscape Communications—because a vast majority of them had an IPO, rode the bubble for a couple of years, then either went bankrupt or were acquired for a fraction of what they were worth in the immediate aftermath of their public offerings, never to be seen or heard from again. KPCB VII no doubt finished with a 124.6% IRR because it completed most of its exits before the bubble burst.
A few of the fund’s notable or interesting investments are listed in the table below.