US Venture Capital Returns: Inception to 3/31/08

Source: Venture Economics, Prof. Paul Gompers HBS      n=1927

Yes… you might want to avert your eyes for this one.

The chart above was first brought to my attention by David Aranoff of Flybridge Capital and geekvc.com fame at a recent ENET event, where he coined it quite appropriately the “Yuck Chart” (a full presentation on the state of Venture Financing can be found on David's blog). Based on this, only the top 25% of VC companies have made a profitable return. The rest have lost money. The chart is even more skewed when you factor in the exit multiples from the milk and honey days of the internet boom.

David posits quite logically that this is a result of something going terribly wrong along the way…and I don’t think he was talking about just the economy. The VC model went from being one where an overabundance of great ideas and an undersupply of capital resulted in only the best ideas being funded to one where an overabundance of similar ideas and an oversupply of capital results in nearly every good idea being funded. Literally, there was just too much cash chasing ideas that just were not up to par. As a result today there are too many entrepreneurs out there who fairly, given the experience over the last decade or so, believe that their ventures are prime candidates for VC financing. Unfortunately, they just might be wrong, 

And with the emperors slowly realizing that their fine new clothes might not be what they originally thought they were, entrepreneurs who think that their venture is VC fundable or a good candidate for VC funding might do well to take a long hard look at their company/start-up and ask if they fit the “best” idea or “good” idea model. From the looks of it from a VC investor perspective, "good" might just be enough for VC funding in the future.

Since I generally hate playing hide the ball, look for a future blog entry that helps shed some light on determining whether VC money is right for your company….