How many years after a financing year does total return = ultimate realized return?

How many years after a financing year does total return = ultimate realized return?

Trevor Kienzle of Correlation Ventures emailed me this data, which I find very interesting. They apply “money ball” principles to venture investing and make for a great co-investor.

Key conclusions we draw from this analysis are:

1. Total returns are typically lower than ultimate realized returns, so they often have the effect of artificially depressing ultimate U.S. venture returns; and
2. Total returns don’t converge with ultimate realized returns until about 7 years following the financing year. Although not depicted in the graph, 7 years was the earliest time point after the financing year when total returns for all financing years evaluated were less than 10% off from their ultimate realized returns.

Please note that this analysis uses financing years, not fund vintages. When interpreting reported returns for fund vintages, we should also take into account that VC funds tend to make new name investments over 3-5 years including and following their vintage year. So, assuming a 4 year investment period, any currently reported returns for U.S. venture fund vintages 2003 and later could be an inaccurate prediction of – and most likely will be lower than – the ultimate returns for those vintages. A summary of the methodology we used in this analysis is included below.

Methodology: to create the graph, we used financing years 1992 to 2005 and assumed total dollar-weighted gross realized returns as of 9/30/13 were the ultimate realized gross returns for all financings in each financing year. Total dollar-weighted returns were calculated for each financing year as of the end of each subsequent calendar year. So, for example, for financing year 1992, the total return 2 years after the financing year equals the total dollar-weighted return for all 1992 financings as of 12/31/94. Total returns include both realized returns and unrealized returns. For this analysis, total returns are based only on the valuation of the latest financing round; i.e., no discretionary write-ups or write-downs by VC funds were assumed.

Twitter: @romansventures

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