The venture capital fund industry is reeling from a report issued by the Kauffman Foundation last month. The tediously titled “We Have Met The Enemy … And He Is Us: Lessons From 20 Years of the Kauffman Foundation’s Investments in Venture Capital Funds and the Triumph of Hope Over Experience” is a blistering, self-effacing critique of the Foundation’s own subpar performance in allocating assets to 100 VC funds over 20 years.
The Kauffman Foundation was created to encourage entrepreneurship. Of its $1.8 billion endowment, approximately $250 million is invested in venture capital and growth equity funds. As the 52-page report reveals, the Foundation has little to show in the way of returns for its support of entrepreneurship.
Kauffman’s return in venture capital over the past 20 years was, on average, 1.3 times the amount that it invested in any given fund—well short of the benchmark two-times committed capital venture rate of return. Moreover the expected liquidity of venture committed capital fell short, as 23 of the 100 VC funds continued to retain capital beyond the anticipated 10-year mark, including one fund in its 19th year still retaining more than 20% of the capital that Kauffman committed back in 1992.
There were some notable winners in the allocation data set. Approximately 15 of the 100 funds exceeded the two-times return multiple. But, the high returns came predominantly from funds raised prior to 1995. As in fine wines, getting the vintage year right is critical.
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Not surprisingly, the Twitter-trained money media had difficulty absorbing, let alone interpreting, the implications of the Kauffman study. (Perhaps because the title of the study exceeded 140 characters.) The same standard of parochial punditry responsible for the recent page-one USA Today story headline “Invest in Stocks? Forget About It” was in play as drive-by journalists and addled allocators declared venture capital dead only a matter of days before Facebook’s pending IPO date.
Kauffman accepts much of the blame for poor returns. Kauffman chastised itself and institutional venture investors in general for failing to focus on mundane issues such as fees, asset allocation models, liquidity and timing considerations.