I’m assuming venture capitalists are pretty smart entrepreneurs to invest seed money (usually their own) into what they feel are the best startups.
I believe though that the ROI for VC is about 6-8%. That is better than a lot of other market investments, but when you consider all the failures and flops it makes me wonder how it works.
What % of a VC’s investments will totally fail, fail but the VC gets their money back, survive, thrive, and become blockbusters? I’m assuming for every facebook there are 10 businesses that survive and pay back the loan, plus another 40-50 that fail and lose money for the VC. What are the ratios of money losses and returns for a VC firm?
Well, according to this FAQ from the National Venture Capital Association, “it is estimated that 40 percent of venture backed companies fail; 40 percent return moderate amounts of capital; and only 20 percent or less produce high returns”. They don’t give an overall return on investment, but they do say that the venture capital industry consistently performs “above the public market”.
The NCVA represents venture capital firms, i.e professional venture capitalists, rather than just individuals willing to invest in startups. In 2010, apparently, $22 billion was invested in 2,749 companies - an average investment o f$8 million per company. And for about 1,700 of those companies, this was not the first investment they had received.
In other words, they’re not talking about funding startups, or funding two-man operations in people’s garages. They fund companies that have already passed through that stage, and survived it. Most of their investments are realised when the company goes public or is acquired in an M&A. That may not happen very early - investments are held on average for 7 to 10 years - but for obvious reasons venture capitalists are reluctant to invest unless the company is on track for flotation or sale.
Returns are presumably much more volatile for those investing in companies at an earlier stage of development.