Larger VC funds underperforming across longer horizons

Print 04 September 2015
PitchBook Blog

Comparing VC horizon IRRs by size buckets yields considerably varied results. The lackluster performance of funds under $100 million in size overall, especially at the five-year horizon and beyond, makes sense, as the level of risk involved implies even the median will remain low on a long enough timescale. Moving up in terms of weight class, the 10-year horizon IRR for vehicles in the $100 million to $250 million range is likely skewed by a cluster of high performers that struck it rich with outsized payouts on modestly sized investments. In contrast, the exact opposite is likely why the median IRR of the largest VC funds dips so low in the long run. Large bets that have not yet paid off are likely to have dragged down overall performance at that point in time.

That underperformance of the larger vehicles in particular illustrates one of the more topical issues still facing VC firms and their backers alike. The surge in performance among recent VC vintages, not to mention the wads of cash being distributed back to LPs, has mollified those clamoring for a redo of typical VC fund structures, but their main point of contention—by and large, VC funds underperform across the customary 10-year horizon and thus should be restructured to account for longer holding periods—is still valid. Whether or not the industry does begin to transform will probably depend on whether the current late-stage valuation boom translates into venture returns befitting the size of the checks written.

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