Today’s issue of Institutional Investor has an interesting article on the reality of 10-year venture funds.
The author presents statistics demonstrating that <10% of ten-year venture funds actually liquidate within 10 years:
Venture capitalists structure and market their funds based on a ten-year fund life. In actuality, only about 7 percent of funds liquidate within a decade, and recent data on fund duration indicate that the median fund takes slightly longer than 14 years to end.
Even more surprising is that 10% of funds live on for 19 years or more:
The author correctly points out that a longer unexpected fund life places pressure on LP ROI, due to the opportunity cost / lost, unavailable “stranded” capital, and incremental GP fees.
Those of us who’ve been around for a few years have known that some funds are well aged. But the extent of the problem is quite surprising.
It would be very interesting to see these data subdivided by investment focus (Biotech, IT, etc.) and stage (seed, etc.).
Now obviously this contingency can be taken into account in the GP/LP agreements, as the author suggests.
Another approach is to set up the fund to that it can list on a stock exchange, either at fund launch or at a specified time and specified valuation.
UPDATE: Bruce Booth posted some interesting stats on the times from first VC investment to IPO. His data show that the time from initial VC investment to IPO for biotech and software are in the 6-8 year range.
His conclusion is that biotech VC investing does fit within a 10-year fund lifespan.
This it certainly true provided that the investments are all made early in the fund life (which they usually are) and that the IPO occurs in a timely manner. We note that some of the slowest VC-to-IPO companies take up to 14 years.