| I find this argument inadequate. The conclusion may be true (that most venture funds lose money) but this article does a poor job of elucidating why this may be the case. There are many directions we can approach this from. First, to simplify, instead of talking about an A and B and having 25% ownership after these rounds. Let's assume $10M is invested in the A for 25% ownership ($10M on a $30M pre-money valuation / $40M post-money.) Of course if each of these companies exits at exactly $50M and money just sits there for 10 years then the returns will be garbage. But in reality if you're investing at a post-money of $40M, very few of your companies will exit at $50M. What actually matters here is what happens with money after exits. If money is returned to investors immediately, then what we want is to solve: $100M * (1.12)^Y <= .25 * (exit price) For example, if ONE company goes from $40M post and exits at $562M after 3 years, and then this money is distributed back to investors, then investors receive .25*$562 = $140.5M as a return, which is more than 12% per year for these three years ON THEIR ENTIRE $100M investment. (This assumed no subsequent dilution but you get the idea.) If money isn't returned directly to investors then it needs to be re-invested. The point is, of course your venture returns will be poor if you just place your cash under a mattress post exits. The math becomes much more favorable for the VCs with realistic time assumptions. |
The article however shows that dilution of that initial "round A" investment by subsequent rounds of capitalization needs to be taken into account (as well as when such a "round B" occurred, but that isn't addressed). It is this dilution that reduces the returns, requiring one or more "unicorn exits" to make the hoped for returns from the initial investment