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1 Steven N. Kaplan
What do Venture Capitalists do?
How Well Have They Done?
Steve Kaplan
University of Chicago Booth Schoo...
2 Steven N. Kaplan
Overview
■  Two parts to the talk:
–  Performance:
»  How have VC funds performed?
■  How does VC compa...
3 Steven N. Kaplan
How have VC funds performed?
■  Fundraising?
■  Performance?
4 Steven N. Kaplan
Fundraising (U.S.)
0
10
20
30
40
50
60
70
80
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 200...
5 Steven N. Kaplan
Fundraising (U.S.) as % of market
0.000%
0.050%
0.100%
0.150%
0.200%
0.250%
0.300%
0.350%
0.400%
0.450%...
6 Steven N. Kaplan
Fundraising
■  Commitments to VC as a % of overall stock market has been much
more stable than is commo...
7 Steven N. Kaplan
What about performance for LPs?
■  How is performance measured?
■  Who measures performance?
■  What ha...
8 Steven N. Kaplan
How is Performance Measured?
■  Two industry standards:
–  Annualized IRR (net of fees).
–  Multiple of...
9 Steven N. Kaplan
■  Each has its drawbacks:
–  Net IRR:
»  Absolute (not relative).
■  Does not control for market movem...
10 Steven N. Kaplan
How is Performance Measured?
■  A 3rd method – KS PME (Public Market Equivalent).
–  Grow LP inflows /...
11 Steven N. Kaplan
Does anyone use KS PME? Calpers
12 Steven N. Kaplan
Who measures performance?
■  Four commercial databases:
–  Burgiss
–  Cambridge Associates (CA)
–  Pit...
13 Steven N. Kaplan
What about performance?
14 Steven N. Kaplan
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011...
15 Steven N. Kaplan
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
So...
16 Steven N. Kaplan
Question?
■  Have VC funds of vintages 2006 to 2013 beaten the S&P 500?
17 Steven N. Kaplan
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011...
18 Steven N. Kaplan
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1999 2001 2003 2005 2007 2009 2011 2013
Source: Burgiss
U.S. VC PMEs by Vi...
19 Steven N. Kaplan
Overall return evidence
■  IRRs, Multiples and PMEs vary substantially across vintage years.
–  PMEs w...
20 Steven N. Kaplan
Question?
■  How has PE done relative to VC?
■  Have PE funds of vintages 2006 to 2013 beaten the S&P ...
21 Steven N. Kaplan
PE vs. VC performance? PMEs
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1999 2001 2003 2005 2007 2009 2011 2013
Source...
22 Steven N. Kaplan
PE vs. VC
■  How has PE done relative to VC?
–  For 1999 to 2005 vintages, PE did much better.
–  For ...
23 Steven N. Kaplan
What will happen going forward?
Returns?
24 Steven N. Kaplan
Future Performance and Fundraising:
■  Performance in VC significantly negatively related to fundraisi...
25 Steven N. Kaplan
Vintage Year PME vs. Capital Committed
26 Steven N. Kaplan
Fundraising (U.S.) as % of market
0.000%
0.050%
0.100%
0.150%
0.200%
0.250%
0.300%
0.350%
0.400%
0.450...
27 Steven N. Kaplan
What will the future hold?
■  Despite all the attention to start-ups / VC, commitments to stock market...
61 Steven N. Kaplan
Steven N. Kaplan
Neubauer Family Distinguished Service Professor
Entrepreneurship and Finance
skaplan@...
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How have VCs done in terms of performance since 2003?

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Venture Capital Returns

  1. 1. 1 Steven N. Kaplan What do Venture Capitalists do? How Well Have They Done? Steve Kaplan University of Chicago Booth School of Business
  2. 2. 2 Steven N. Kaplan Overview ■  Two parts to the talk: –  Performance: »  How have VC funds performed? ■  How does VC compare to PE? »  How will VC perform going forward? –  What do VCs do?
  3. 3. 3 Steven N. Kaplan How have VC funds performed? ■  Fundraising? ■  Performance?
  4. 4. 4 Steven N. Kaplan Fundraising (U.S.) 0 10 20 30 40 50 60 70 80 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 $Billions Commitments to U.S. Venture Capital Partnerships 1980 - 2015 (in $ billions) Source: Private Equity Analysis, Steven N. Kaplan
  5. 5. 5 Steven N. Kaplan Fundraising (U.S.) as % of market 0.000% 0.050% 0.100% 0.150% 0.200% 0.250% 0.300% 0.350% 0.400% 0.450% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Commitments to U.S. VC Partnerships as Fraction of Stock Market Capitalization 1980 - 2015 Source: Private Equity Analyst, Steven N. Kaplan
  6. 6. 6 Steven N. Kaplan Fundraising ■  Commitments to VC as a % of overall stock market has been much more stable than is commonly appreciated. –  Usually between 0.10% and 0.20% of total stock market. –  Big outliers were 1999 to 2001. –  On the low side since 2009.
  7. 7. 7 Steven N. Kaplan What about performance for LPs? ■  How is performance measured? ■  Who measures performance? ■  What has performance been on average? ■  Are there good GPs? ■  Summarize results from –  Harris, Jenkinson, Kaplan (2014 and 2016) –  Brown, Harris, Jenkinson, Kaplan, Robinson (2016)
  8. 8. 8 Steven N. Kaplan How is Performance Measured? ■  Two industry standards: –  Annualized IRR (net of fees). –  Multiple of Invested Capital (MIC). »  Total Value Returned / Invested Capital. »  (Distributed Value + Residual Value) / (Capital in Cos. + Fees) ■  Each has its drawbacks.
  9. 9. 9 Steven N. Kaplan ■  Each has its drawbacks: –  Net IRR: »  Absolute (not relative). ■  Does not control for market movements. »  Is sensitive to sequencing of investments. –  Multiple of Invested Capital: »  Absolute (not relative). ■  Does not control for market movements. How is Performance Measured?
  10. 10. 10 Steven N. Kaplan How is Performance Measured? ■  A 3rd method – KS PME (Public Market Equivalent). –  Grow LP inflows / investments at S&P 500 (or other return). –  Grow LP returns / distributions at S&P 500 (or other return). –  Compare value of outflows to inflows. –  If PME > 1, then LPs did better than S&P 500. » + Does control for the market. » + Not sensitive to investment sequence. ■  Think of PME as a market-adjusted multiple.
  11. 11. 11 Steven N. Kaplan Does anyone use KS PME? Calpers
  12. 12. 12 Steven N. Kaplan Who measures performance? ■  Four commercial databases: –  Burgiss –  Cambridge Associates (CA) –  Pitchbook –  Preqin –  Thomson Venture Economics (VE)
  13. 13. 13 Steven N. Kaplan What about performance?
  14. 14. 14 Steven N. Kaplan -20.0 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Burgiss U.S. VC IRRs by Vintage Year, 1991 - 2013 Pooled Ave. as of September 2016
  15. 15. 15 Steven N. Kaplan 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Burgiss U.S. VC MOICs by Vintage Year, 1991 - 2013 Pooled Ave. as of September 2016
  16. 16. 16 Steven N. Kaplan Question? ■  Have VC funds of vintages 2006 to 2013 beaten the S&P 500?
  17. 17. 17 Steven N. Kaplan 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Burgiss U.S. VC PMEs by Vintage Year, 1991 - 2013 Pooled Ave. as of September 2016
  18. 18. 18 Steven N. Kaplan 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1999 2001 2003 2005 2007 2009 2011 2013 Source: Burgiss U.S. VC PMEs by Vintage Year, 1999 - 2013 Pooled Ave. as of September 2016
  19. 19. 19 Steven N. Kaplan Overall return evidence ■  IRRs, Multiples and PMEs vary substantially across vintage years. –  PMEs well above 1.0 through 1998. –  PMEs below 1.0 1999 to 2002. –  PMEs above 1.0 since 2003.
  20. 20. 20 Steven N. Kaplan Question? ■  How has PE done relative to VC? ■  Have PE funds of vintages 2006 to 2013 beaten the S&P 500?
  21. 21. 21 Steven N. Kaplan PE vs. VC performance? PMEs 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1999 2001 2003 2005 2007 2009 2011 2013 Source: Burgiss U.S. VC and PE PMEs by Vintage Year, 1999 - 2013 Pooled Ave. as of September 2016 VC PME PE PME
  22. 22. 22 Steven N. Kaplan PE vs. VC ■  How has PE done relative to VC? –  For 1999 to 2005 vintages, PE did much better. –  For post-2006 vintages, VC has done better.
  23. 23. 23 Steven N. Kaplan What will happen going forward? Returns?
  24. 24. 24 Steven N. Kaplan Future Performance and Fundraising: ■  Performance in VC significantly negatively related to fundraising. –  Even more so. –  IRR in Vintage Year = »  43% - 75 x VC inflows in current and prior year as % of stock mkt. –  Multiple in Vintage Year = »  4.39 - 626 x VC inflows in current and prior year as % of stock mkt. –  PME in Vintage Year = »  2.48 - 279 x VC inflows in current and prior year as % of stock mkt. –  On average VC inflows = 0.135% of stock market. (2 years 0.27%).
  25. 25. 25 Steven N. Kaplan Vintage Year PME vs. Capital Committed
  26. 26. 26 Steven N. Kaplan Fundraising (U.S.) as % of market 0.000% 0.050% 0.100% 0.150% 0.200% 0.250% 0.300% 0.350% 0.400% 0.450% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Commitments to U.S. VC Partnerships as Fraction of Stock Market Capitalization 1980 - 2015 Source: Private Equity Analyst, Steven N. Kaplan
  27. 27. 27 Steven N. Kaplan What will the future hold? ■  Despite all the attention to start-ups / VC, commitments to stock market value not particularly high relative to historical means. ■  Will probably be higher this year, but nowhere near tech boom. –  Commitments to PE are at historically high levels. ■  Accordingly, still feel better about VC than about PE.
  28. 28. 61 Steven N. Kaplan Steven N. Kaplan Neubauer Family Distinguished Service Professor Entrepreneurship and Finance skaplan@uchicago.edu
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How have VCs done in terms of performance since 2003?

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