VC Practices Survey
One-third of the VCs felt that the ideal internal rate of return (IRR) that they were |
VC data for the USA (1980-1997) indicates that funds which were less than 2 years old had generated average IRRs of 2-14% (did not get enough time to appreciate), 3-8 year old funds had generated average IRRs of 14-36% (best time frame for returns), while 8-18 year old VCs had generated returns of 8-26% (cannot generate high returns over very long periods of time). Thus actual returns were well below the expectations outlined above. This is due to the fact that in a portfolio of investments, VCs need to target for consistently high returns of 40-45% or over so as to cover up for losses which they are bound to make in a substantial number of their investments. In fact, it is out of the phenomenally high actual returns from a handful of investments that VCs manage high average IRRs. VC reputations are often built on one or two good investments, e.g. the first portfolio of Kleiner Perkins first fund invested USD 7.5m in 17 companies and returned USD 345m. In this fund, only two investments, Tandem and Genetech, generated USD 325m, the remaining barely broke even or made losses. |
An overwhelming percentage of the VCs stated that the average length of time they |
Considering that high returns are to be maintained for at least 3-4 years to interest VCs, only entrepreneurs with sound business strategies capable of generating such returns over this time span need get in touch with VCs. Their business plan should bring out this aspect quite clearly. |
After this period the VCs would adopt any strategy to exit the business depending on |
looking for ranged from 40-45%. Nearly 15% of them were looking for an IRR of 35-40% while another 18.5%
felt content with an IRR of 30-35%. There were very few takers for IRR below 30%. On the flip side, nearly one-third of the VCs were looking for IRR over 45%.
wished to invest in a company was between 3 to 4 years. This time horizon could be a
result of changing technology providing a very small window of opportunity for commercial exploitation. If the venture does not provide expected returns in this
time frame it may not get any further time to do so since a new technology may already have come into the market, eg. pagers vis-a-vis cell phones, cable TV vs. DTH, landline based vs. satellite dish based internet connectivity etc.
the business realities. Slightly over one-third felt that they would take the IPO route to exit the business.
Entrepreneurs should expect funding only for a limited period of time, thereafter their business is expected to look for meeting capital requirements from traditional sources such as capital markets and financial
institutions. However, after the VC exits, an IRR of more than 30% which has been achieved consistently over a period of 3-4 years, would convince even the most hard
nosed bankers to part with their funds even to ventures which were once considered "unbankable" (such as software development). |
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