Last year had the potential to show that US venture capital firms (VCs) were set to have a bumper year with booming public equities and a recovered IPO market which generated record portfolio company exits and distributions from VC funds, according to a manager of a portfolio of endowment investments in VC and private equity funds.
However, annual industry performance data from Cambridge Associates shows that venture capital continues to underperform the S&P 500, NASDAQ and Russell 2000.
an article for Harvard Business Review's Blog Network, Diane Mulcahy, an
Irish American who is a Kauffman Foundation (America's leading
entrepreneurship think-tank) senior fellow, outlines the economic misalignment
of the VC industry, which allows VCs to enjoy high levels of fee-based
compensation, even when their funds perform poorly
Mulcahy writes: "VCs have a great gig. They raise a fund, and lock in a minimum of 10 years of fixed, fee-based compensation. Three or four years later they raise a second fund, based largely on unrealized returns of the existing fund. Usually the subsequent fund is larger, so the VC locks in another 10 years of larger, fixed, fee-based compensation in addition to the remaining fees from the current fund."
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