Are VC Returns Unfairly Judged? Why Fred Wilson is a Great Host & Thoughts on Doriot Quote du Jour

For the last six days, Fred Wilson has been posting a Doriot Quote of the Day. It’s a new addiction of mine to see what quote Fred comes up with each day. He’s picked some of my favorites and surprised me some other times.

Like today, Fred quoted me! Here’s the snippet from Fred’s blog A VC:

“Thanks to Digital Equipment’s blockbuster IPO, ARD met Doriot’s goal of generating superior performance by producing a 17 percent rate of return during its twenty-one year history, a significantly better return than the 13 percent average of the Dow Jones index during the same period.”

This is not a Doriot quote either. In fact, it’s not a quote at all. Spencer Ante wrote this. The reason I posted this is that I think the expectations for venture capital have been skewed by several periods of strong returns (the late 90s in particular). Over the long haul, I think VC should produce high teens/low 20s returns after fees and carry. The 17 percent number that ARD delivered seems about right. You have to remember that 17 percent over twenty-one years is 23x the initial capital invested.

So far, the post has generated 13 comments.

One reader Mats Myrberg asked:
17% over 21 years is really an incredible record. If you take out the DEC IPO what does the record look like? Also is there historical data on VC funds (and managers) and their return rate to give this more context? This would be interesting data.

Good question, Mats. As Fred says, VC is a business based on the long ball. If you strip out DEC, ARD’s 25-year rate of return was 7.4%, according to a report by Patrick Liles that I sourced in the book. It’s 25-year rate of return was 14.7%.

Here are the rest of the return figures for ARD. As you can see, ARD reached its peak return as an independent firm in 1969 when it hit 17.9%. I bet if you held onto your portion of DEC shares, that return would have gone even higher, above 20%, because DEC continued its spectacular run for another 10 years.

1966 9.5%
1967 16.7% (this is the figure that Fred referenced in his original post, one year after the DEC IPO super-charged ARD’s portfolio)
1968 15.5%
1969 17.9%
1970 14.9%
1971 14.7%

One final thought: As the NYT review pointed out, Doriot’s “genius was to coax investors to wait through years of uncertainty.” Consider this: ARD did not generate a positive return on its original $3.5 million investment fund UNTIL ITS EIGHTH YEAR!!! And even then the return was a paltry 1.5%. It was not until 1959 that ARD started to generate returns in excess of 5%. And it never reached a double-digit return until 1967. So you gotta hit that home run to outperform the market.

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One Response to “Are VC Returns Unfairly Judged? Why Fred Wilson is a Great Host & Thoughts on Doriot Quote du Jour”

  1. Are VC Returns Unfairly Judged? Why Fred Wilson is a Great Host & Thoughts on Doriot Quote du Jour « Says:

    [...] Are VC Returns Unfairly Judged? Why Fred Wilson is a Great Host & Thoughts on Doriot Quote du Jour Posted on June 5, 2008 by kingstonchronicle By Creative Capital [...]

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