Entrepreneur, Explorer, Angel.

Sometimes all at Once.

15TH April 2011

Angel investing - Business Tricks - Cellufun - Entrepreneur - Mojiva - Operative - Timeless - Venture Capital

Stop: don't let kids do this without considering the consequences!


VCs... deserve some respect!

As the summer intern wave hits New York, I get my share of inquiries from very smart kids wanting to become VC’s.

And now I know, as Rodney Dangerfield once said, why tigers sometimes eat their young!

It’s that tough a world. Yes, I’ll be the first to tip my hat to some great VC successes (not much ink is wasted on the failures), and it makes a wonderful pickup line for Wedding Crashers.  But being a VC today- or tomorrow- is way harder than it looks. First-time funds, no matter how much they raise, are basically start-ups under intense pressure to provide a preferred return to their investors before they get paid anything special. They have to be incredible consensus-builders within their firm  to get anything approved. And the deals that everyone wants come with incredible competition from everyone else looking at the same thing.  This is not a profession to wander into with stars in your eyes. If you do, expect your Share of Crashes.

According to a recent Cambridge Associates Study, short-term returns in 2010 were fine (based on data from nearly 1,300 funds raised between 1981 and 2010, U.S. venture capital rose from 6.4% at the end of Q2 2010 to 8.2% by the end of Q3 2010,). But venture is a long-term asset class. The median net return to VC fund investors has not been positive for any vintage year since 1998. Cambridge reports that 10-year returns fell from a miserable -4.2% to a downright horrid -4.64% over the relevant period. Five-year returns fell from 4.3% to 4.25%. Think about that for a moment: despite the past decade’s many hits (Google, YouTube, etc.), the typical VC fund has lost money for its limited partners. Even the top-quartile benchmarks over the past decade aren’t very impressive, with the best figure coming in at 5.59% for 2001 vintage funds.

I was a VC for a brief moment in time and it was fun, profitable — and nothing I would ever attempt to repeat.  From 1997 to 2000, Capital Express, having failed to raise any big money like our competitors in the dot.com chase, had a measly $4M to invest. But we picked right (including an IPO that reached a $4 Billion valuation for a moment) and we exited with great timing, returning 100x. It was the top of the bubble. My partners were fantastic, our timing was fortuitous, but I know the difference between luck and skill, and believe me, as good as we thought we were, we were luckier than we will ever know.

Do not try this at home! Your results may vary depending on many circumstances. The mortality rate of VC’s and their funds is stunning.  Thats why I now leave that work to smarter people, and wish them all the best. And I do that often because I see them practically everyday: in the past five years,Vaux’s companies like Cellufun, Operative, Mojiva and more have raised nearly $50M in capital from VCs.  I  sit on panels with them, across board tables from them, and see them constantly in subsequent fund raises for growing companies. They’re incredibly smart, ask great questions, usually have relevant and helpful operating experience, and work really hard. Yet, their fate lies with the luck and timing of a random world.

Is that a profession I would encourage a little cub to venture into? I respect VC’s, I just don’t encourage more of them.

And if they absolutely insist, I wish them all the luck.

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