Chapter 9: The Performance of Venture Capital Investments
Benoit F. Leleux Introduction Venture capital is an interesting industry in which at least 75 per cent of the players you talk to are top quartile performers . . . This tongue-in-cheek reference by a leading institutional investor (who preferred to remain anonymous) points not only to many venture capitalists’ tendency for self promotion but also to a more fundamental issue the industry has struggled with since its inception, namely the best metrics to use to report its ﬁnancial performance. The issue has proven a very diﬃcult one to tackle by the academic and the professional communities alike, due to a unique combination of factors such as: (1) the basic diﬃculties in valuing venture capital investments (mostly minority stakes in restricted stocks of early stage, technology-rich companies), which test the limits of standard valuation techniques; (2) IRR-boosting cash ﬂow management techniques, such as the progressive drawdown of the fund commitments; and (3) the very private nature of the industry, where reported numbers are often aggregations of self-reported rates of returns. In this chapter, we oﬀer to review the documented drivers of venture capital performance and the issues related to ﬁnancial metrics in the venture capital industry, oﬀering a critical perspective on the limitations inherent in the system. The ultimate objective is to develop a grounded understanding of the performance dilemmas in the venture capital industry, more than it is to ‘explain’ variations in performance. While no comprehensive study exists to ‘explain’ fund performance, a growing body of evidence points...
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