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.

Advertisement

Doriot Quote Of The Day

This just in from Fred Wilson’s Blog A VC.

“At early board meetings, I would try to give an accurate accounting of the profit and loss. He would look through me and ask what I really thought about when I was shaving.”

High Voltage Engineering CEO Denis Robinson, about General Georges Doriot

Says Fred: I really loved this one. Its rarely about the numbers at the early stage. Its about the challenges and opportunities. Speaking of “loving this one” I’ve noticed few if any comments on these Doriot quotes. Am I the only one enjoying them?

So far, 32 people have left comments after Fred’s question–and most folks said they liked the quotes, which makes me feel good. A few people have even gone out and bought the book as a result of reading the Doriot quotes.

What do you think about when you are shaving?

Fred Wilson Blogs About Creative Capital

Fred Wilson, the co-founder of the New York venture capital firm Union Square Ventures (and an all-around nice and really smart guy), was kind enough to blog about my book this morning on his popular blog, A VC.

Fred, I know you have not received your book yet. But when you do I would be honored to sign it any time you want!

Says Fred:

“Who is the father of modern venture capital? Surely someone from Silicon Valley in the late 60s and early 70s, right? Wrong.

The father of modern venture capital is General Georges Doriot who helped to form and run American Research and Development, the first modern venture capital firm in Boston right after World War II. Doriot also taught at Harvard Business School and was a mentor and teacher to the first generation of Boston VCs who operated in the 60s and 70s.

With all the focus on the bay area and its history as the center of innovation in information technology, Doriot’s contributions are often overlooked. But now we have a new book and a blog, courtesy of Spencer Ante of Business Week.

Ante’s Creative Capital is about Doriot and the start of the venture capital business here in America post world war II. I haven’t read it yet, but I just ordered it on Amazon. Here’s a short excerpt from the Harvard Business School blog. I suspect the readers of this blog are the perfect audience for this book so you should all go check it out.”