| Topic Name: |
VC is low paying |
| Message Name: |
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| Date Posted: |
02/28/2002 |
| In Reply To: |
It may be true that competition is eroding returns in the LBO industry, but argument that VC returns are superior is specious.
1. The weighted average return of VC funds over the last 15 years is far less than 40%. Perhaps you don't remember what life was like before the bubble economy. VC funds returned 30-40% IRRs in the 95-00 period, and a basket of the best ones returned 20-25% before then. In 2000-2001 they will have returned FAR less, with many firms posting results deeply in the red.
2. Over 70% of ALL VC capital raised in the last 20 years was raised in 1999-2001. Competition has intensified far more rapidly in the VC industry than in LBO. This is no accident. The higher IRR's during the internet bubble days coupled with low barriers to entry (any two guys and a dog can do a VC deal; VC funds are smaller and have been easier to raise; it takes substantially more experience to do a large leveraged buyout given larger capital deployed and the need to deal with public financing markets) made this a very attractive industry for new entrants.
3. It's utterly false to say that big VC funds are still making more money than top LBO firms (e.g. Tommy Lee). This simply isn't true given that a) few of them exited any last year at anything resembling 20+% IRR, b) most of the large funds burned a lot of cash on portfolio companies given illiquidity in public markets c) there has been undeniable malaise settled over at least the silicon valley vc's.
Top VC funds will still continue to do well because of their franchise and their experience. The same can be said of top leveraged buyout firms (which KKR may or may not qualify as). The assertion that the VC industry is "better" than LBO is far from clear and probably isn't true.
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| Message: |
First, there is no "better." This thread started as "more profitable."
We're not that far apart here on perspective.
I'd be the first to say that VC's are killing the golden goose as we speak with oversized funds. Up until now, that was not the case and LBO's were dealing with the glut of cash from the late 80's married with overpriced equity in the 90's (bad combination).
I'd be the first to agree that KKR is a name everyone knows but whos star is fading. Kleiner Perkins has the same issue in VC.
If you want to match the best against the best, I'd stack Matrix Partners up against Tommy Lee any day for returns.
I stand by my 40% figure (got it from a book on entrepreneurship). Obviously that's going to seriously dive in 01 and 02, but the trend line goes back 20 years.
It takes substantially more FINANCE (yawn) experience to do an LBO deal. The best VC's have built several successful companies of their own before becoming investors. Anyone and their dog CAN NOT do that.
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