Behind the VC Music

VALLEY TALK 
Behind the VC Music 
FORTUNE 
Wednesday, November 22, 2000 
By Mark Gimein

Stephen Lisson is not a conventionally likable guy. On more 
than one occasion, he’s implied that I’m the single stupidest 
reporter he’s ever talked to. He has kept me on the phone for 
hours at a time listening to the most arcane statistics, until I’ve 
slammed down the phone in frustration. He calls people who 
disagree with him “lickspittles.” He dismisses many of the 
visitors to his Website as “parasites.”

And yet over the past few months I have repeatedly gone back to 
Lisson and his new Website, InsiderVC.com, because Lisson has 
the best data out there about venture capital, and often the most 
interesting things to say about it.

Venture capitalists are the rock stars du jour of the financial 
world, a species of money managers who are believed capable of 
superhuman wisdom. Business magazines tend to assume that 
the richer you are, the smarter you must be, and the Internet 
boom has lavished untold riches on the venture capitalists who 
invested early.

“Untold” is a key word here, because hardly anyone knows 
exactly how great these riches are. In this way, venture-capital 
funds are very different from, say, mutual funds. Venture 
capitalists talk vaguely about “triple-digit returns,” but even 
successful funds tend to keep their returns a closely guarded 
secret. And even when they do reveal numbers, they can be hard 
to understand.

This is where Austin, Texas, entrepreneur and venture-capital 
gadfly Stephen Lisson comes in. Through years of research and, 
apparently, a lot of cooperation from a network of sources 
willing to send him copies of the reports that venture-capital 
firms send out to their investors, Lisson has gathered an 
immense database of information about venture-capital firms’ 
investments and profits.

Lisson doesn’t make all his data public — much of his information 
is limited to subscribers, and he can be picky even about whom 
he allows to subscribe. But what he’s already revealed in the 
public sections (for example, see: Database Example) of 
InsiderVC.com is fascinating. Some of his data shows exactly 
what you might expect. Benchmark Capital Partners’ 1995 fund-the 
fund that famously invested in eBay — has already returned to 
its investors 38 times the money they put in. Investors who put 
money into the fund that Kleiner Perkins Caufield & Byers, 
Silicon Valley’s best-known venture-capital firm, raised in 1996, 
have already made a similarly spectacular return of over 1,000%.

But you’ll also find that the 1997 fund raised by Hummer 
Winblad, another venture-capital firm that has traditionally 
received a lot of attention from the press, has so far returned 
only 42% of its investors’ money. That might be a decent 
showing in any other era, but in the middle of the biggest 
technology boom or bubble in history, it’s not great, and not 
nearly as good as some of Hummer Winblad’s peers. (Typically, 
venture funds distribute cash or stocks as the companies in their 
portfolio are sold or go public. In theory, that means they can 
continue paying out money to investors for a very long time, but 
in practice, almost all of their profits are made in the first six 
years of the fund.)

Even more interesting are the data that Lisson has gathered on 
how venture capitalists value their investments. Venture 
capitalists measure their own performance by an “internal rate of 
return” — an annualized rate of increase in the value of their 
investments. Often that’ll be a number in the high double digits, 
sometimes in the triple digits. Sounds pretty good when you 
compare it with the typical mutual fund. But if you look at the 
InsiderVC.com database, you’ll find that funds claiming 
immense annual returns sometimes pay out a lot less money to 
investors than you’d imagine.

As of March 2000, Benchmark claimed an annualized return of 
an amazing 279% for Benchmark III, the fund that the firm 
raised in 1998. But wait a second! Lisson’s data also show that 
Benchmark III hadn’t actually distributed any cash or stock to its 
investors. That 279% return was based on a guesstimate of the 
value of the companies Benchmark has invested in — companies 
that, since they hadn’t gone public, are notoriously hard to value. 
One of those companies, Living.com, has already gone bankrupt, 
reducing the value of Benchmark’s investment from an estimated 
$74 million to zero. And it’s hard to believe that, with the Net 
bubble bursting, Benchmark’s investment in eBags.com is really 
worth the $20 million-plus that Benchmark valued it at in 
March.

For individual investors who don’t have a prayer of putting their 
money into funds that deal only with tech insiders, large 
institutions, and foundations, analyzing exactly how much the 
top funds make can certainly seem like an academic exercise. It 
can all sound arcane, confusing, and dull, and if you are not an 
investor in venture-capital funds, I don’t recommend it as a 
hobby or a business. But it’s important that somebody do it. 
First, because venture investment is the engine driving much of 
Silicon Valley’s technological innovation. And, second, because 
it’s important for somebody like Lisson to remind investors and 
the business press that venture capitalists are not the gods of 
finance they are often made out to be, but instead, very well-
trained money managers. Sometimes very smart money 
managers, sometimes very lucky money managers, but 
nonetheless, financiers who’ll often make a lot of money and 
sometimes, like the rest of us, flub it.

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