The Holy Grail: Tracking Top Venture Capital Returns

Atish Davda is the founder and CEO of EquityZen, a marketplace for private investments. This article originally appeared on their blog.

Research firms like Cambridge Associates and Thomson Reuters regularly release benchmark statistics in the venture capital and private equity space which give us an indication of target returns, but what we really want are the numbers from specific venture capital funds to see who has that next Facebook. So here at EquityZen, we’ve been trying to figure out a way to identify and compare the returns of top performing venture capital funds – something we informally like to call the Holy Grail.

We thought it might be useful to share this information with the community, and it certainly doesn’t hurt that many of the investment opportunities on our platform are in companies backed by the same top tier of venture capital firms. As a disclaimer, this information is just a starting point and certainly doesn’t correlate to the exact returns of venture funds.

Venture funds are often measured by, and raise their funds on the strength of, their net internal rate of return ("IRR"). Net IRR measures an investment's yield by providing its expected rate of return. In financial terms, it is the discount rate that equates the net present value of cash flows to zero, net of management fees and carried interest. Metrics such as IRR are very difficult to find for individual venture funds and not usually publicly available. As such, here are two possible ways of identifying top venture funds:

1. The Unicorn Whisperers

Note: Unicorns in this list are limited to early-stage startups.

One easy way of identifying strong venture capital firms is to look at the number of unicorns they have produced. If we look at early-stage investments in startups like Dropbox and Evernote that eventually become billion-dollar “unicorns,” Sequoia Capital comes out on top with 17 companies in its portfolio. SV Angel and First Round Capital follow with 9 and 8 investments respectively, and Accel Partners, Benchmark Capital, and Khosla Ventures tie for 4th place with 7 investments.

For those that are curious, if we look at all-time investments (including late-stage deals and follow-on investments), the top 5 investors would be Sequoia Capital (17), Kleiner Perkins Caufield Byers (15), Andreessen Horowitz (15), T. Rowe Price (14), and SV Angel (12).

2. The Money Makers

The other method that we are more interested in is a way to identify the top performing venture funds. Since venture firms do not publicly disclose these numbers, we had to come up with creative ways to figure out returns.

One available (although paid) resource is the Preqin database. The database reports net IRR per fund but unfortunately does not paint a full or accurate picture of fund performance as its numbers are self-reported; it also lacks returns from many prominent funds. However, it is a great starting point for investors.

Another way of obtaining IRR numbers (other than through cash flows) is to look at the yields of pension funds. Since pension funds are required to disclose their private investment holdings and returns, we looked at a few select ones such as CalPERS, UTIMCO, OPERF, and MainePERS to see if there was a common thread. It’s difficult to get an accurate picture of fund performance across different vintage years (funds circa 2000 will have very different benchmarks than ones raised recently), but across the different pension funds there were a few fund managers such as Union Square Ventures that have historically done well.

Note: Average Net IRR is calculated using the average of all funds over all vintage years.

3. So What Does This All Mean?

The first takeaway is that the funds with the top returns come from the prominent venture capital firms we all know and love. Some notable VCs to follow are Sequoia Capital, Union Square Ventures, Institutional Venture Partners, Accel Partners, and Technology Crossover Ventures. Second, funds can be successful without a large number of billion-dollar valuation investments and a herd of unicorns. Union Square Ventures does not rank even in the top 10 of unicorn chasers; however, it boasts the highest pension IRR and over 8% of its 62 early-stage investments have been unicorns. Additionally, if you don't have a subscription to a private database with robust information on funds, you can take a look at the investors of the 100+ unicorns as a very rough proxy for portfolio quality.

Unless you're Stanford's endowment or CalPERS it may be tough to get an allocation into a top tier VC's latest fund, especially with a check south of $1 million. However, using the tools above, you can figure out which VCs are doing the best, and attempt to track their portfolio through a platform like EquityZen, all with a check size as small as $20,000.