Venture Returns Shrinking in 2008

Venture capital funds are still more profitable for their investors than the stock markets, according to new statistics released today bythe National Venture capital Association and Thomson Reuters. But their profitability decreased during the first quarter of 2008.

One reason is the increased difficulty of making an exit in the current economic conditions. “The IPO market has now been essentially shut down for venture-backed companies for over seven months,” NVCA president Mark Heesen said in a statement accompanying the report. “Combined with a skittish M&A [mergers and acquisitions] market, shorter term performance returns are and will be impacted.”

According to the NVCA report, the “one-year private equity performance index” was 13.3 percent in the first quarter of 2008. That is 7.6 percentage points less than in the fourth quarter of 2007, but still far better than the performance of the major stock markets—during the same period the NASDAQ and S&P indexes fell with 5.5 and 6.4 points respectively. When making the same comparison for longer periods, up to 20 years, the venture funds outperform the public markets in nearly all time horizons, the exception being the five year horizon.

I found an interesting trend in the data: In the long run, early stage investing seems to be far more lucrative than putting money into the later stage VC funds. Measured over the 10-year period, early stage funds performed roughly four times as well as later stage funds. Over a 20-year period the early stage funds returned roughly 1.5 times as much as the later stage funds.

Erik Mellgren is a Swedish journalist who worked for Xconomy Boston in 2008 as part of the Stanford Innovation Journalism Fellowship program. His real job is with Ny Teknik, a leading technology and innovation magazine in Sweden, but he loved seeing the Red Sox at Fenway. Follow @

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