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.
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 notes that VC funds persistently underperform the fully liquid, low cost
public equity markets, yet VCs themselves continue to receive high levels of
She questions whether institutional investors should continue to pay VCs well
regardless of return performance, and offers recommendations for how investors
in venture capital funds can hold VCs more accountable.
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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