Five Research-backed Truths about Venture Capital

I joined the venture capital industry just over a year ago and have had a steady diet of blog posts and newsletters that highlight specific companies, technologies, and trends. While this has been good food for thought, I often seek understanding of the bigger picture. A recent lecture I attended was particularly helpful in providing such a perspective, with good data to support.

Last month, Chicago Booth professor Steven Kaplan* discussed trends in venture capital based on his research involving 889 venture capitalists across 681 firms, with roughly 25% of those based outside of the US.**

“A Lecture on Decisions and Performance in VC”

Here are my five revelations from Professor Kaplan research and lecture:

The Horse matters, but VCs back the Jockey

  1. While VCs care about the business model, technology, industry, and other factors (the Horse), the most important factor for backing a startup was the management team (the Jockey).

Even investors in Unicorns believe they are overvalued

2. “Unicorns are overvalued” was claimed by both investors in a $1B+ valued round (average 91% of 308 total responses) and those who did not participate in the round (average of 92% of 185 total responses).

Key: Numbers on the top line, represent percentages of VCs whom believe unicorns to be overvalued. Numbers in parentheses represent margin of error, and the bottom line represents the number of respondents.

It’s the deals you do, not those you see

3. Of the surveyed VCs, almost half (~49%) believe prudent deal selection is the most important contributor to Fund success; more so than value-add services (~27%) and access to good deal flow (~23%).

Venture Capital returns are actually better than S&P’s

4. For an asset class that’s taken a lot of heat for undersized returns, VC returns have performed better than returns on the U.S. S&P stock market since 2003.

Key: Years above a 1.0 on the y-axis, represent VC returns better than the market average.

From 1991–1998, VC returns were well above the S&P.

From 1999–2002 (“bubble burst”), VC returns were below the S&P.

From 2003 onwards, VC returns have performed slightly better than the S&P.

No, we’re not in a VC bubble

5. Commitments to VC funds, as a percentage of stock market value, are not nearly not as high now as they were in the bubble of the late 1990s.


*Professor Steven N. Kaplan is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance and Polsky Center for Entrepreneurship and Innovation Faculty Director at the University of Chicago Booth of Business

**Methodology: Kaplan and colleagues (Paul Gompers of HBS, Will Gornall of UBC, and Ilya Strebulaev of Stanford GSB) surveyed 889 institutional venture capitalists (VCs) at 681 firms to learn how they make decisions across eight areas: deal sourcing; investment decisions; valuation; deal structure; post-investment value-added services; exits; internal organization of firms; and relationships with limited partners. The team also explore differences in practices across industry, stage, geography and past success. They compare their results to those for CFOs (Graham and Harvey 2001) and private equity investors (Gompers, Kaplan and Mukharlyamov, forthcoming).

Special thank you to Sid Mofya and Gabe Turner for your assistance when gathering these thoughts together.