Venture Capital — No, We’re Not Normal

David Coats
Sep 11, 2019 · 4 min read
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In fact, we are highly skewed.

Most of us know intuitively that venture investing is a hits driven business. A relatively small number of winners drive returns. However, you might be surprised by how skewed the distribution of outcomes actually has been.

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Data from Dow Jones VentureSource and other primary and secondary sources

The above graph plots the percent of both financings and invested dollars by realized cash-on-cash multiple for U.S. venture-funded companies in our database exiting over the past decade, including those that went out of business, went public, or were acquired.

About half (51%) of all of the capital invested into venture-funded companies exiting over the last decade lost money, while less than 4% generated a 10X or greater multiple. When calculated as a percent of financings, rather than by dollars, the distribution is even more skewed: almost two thirds of financings lost money for investors.

The reason for the difference is that earlier stage rounds — with smaller average round sizes, higher risk, and higher average returns — will have greater influence on the percent of financings statistics, while later stage investments will dominate the percent of dollars statistics.

We were curious as to how the “hit rate” — which we defined as the percent of invested dollars generating a 10X or greater return — has changed over time, and how closely this tracks overall industry returns. The graph below plots the hit rate versus mean dollar-weighted realized multiple for the U.S. venture industry for each exit year since 1990.

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Data from Dow Jones VentureSource and other primary and secondary sources

Our initial thoughts after seeing this graph were:

1. Wow, we wish we could go back and “party like it’s 1999” (to quote Prince).

2. Mean realized returns and the hit rate have both been steadily rising over the past decade, but only recently reached the levels seen in the years 1990–1992.

3. We were impressed by how closely these lines track each other.

In fact, the correlation between mean realized industry returns and the percent of invested dollars realizing a 10X+ return is .98 on a scale of -1 to 1 (where 1 is a perfect positive correlation, and 0 is no correlation). This implies that VC industry mean returns are highly impacted by the largest returning financings, in effect that returns are “hits driven”.

One implication we see from these statistics for VCs, entrepreneurs, and LPs is that it is rational for many VCs to have a “swing for the fences” strategy where we invest in opportunities that have the potential to be a break-out winners and avoid those where the outcome is capped from the outset.

So, VCs…it’s OK to not be normal.

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If you are entrepreneur raising or working with a team that is closing a round, we would value any introductions where we might be helpful as a co-investor.

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Correlation Ventures is the predictive analytics pioneer in the venture capital industry and the industry’s leading co-investor. With more than $360 million under management, we’re one of the most active U.S. venture investors, investing in about two to three new investments a month. Over the last five years, we’ve invested in over 185 companies. Selected portfolio companies include: AlienVault, Bluevine Capital, Casper, Optimizely, Personal Capital, Sun Basket, Galera, Synthorx, and Upstart. Correlation offers a dramatically better option for lead investors, syndicates, and companies seeking additional venture capital to fill out a round. We offer the most rapid, convenient, and reliable source of co‐investment capital in the industry; for example, committing to make investment decisions within two weeks or less. Correlation is backed by leading institutional investors.

VC by the Numbers

Venture capital insights from the Correlation Ventures…

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