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This is the best post I have seen all year. Seriously OUTSTANDING!!!
Its about time that people wake up and see why the VC industry is so secretive. They are milking pension funds for billions of dollars every year in just management fees. Consider that my wife contributes to CalStars pension (Ca. Public Teachers retirement) I take this quite personal. Imagine some *asswipe* GP making a seven figure salary, having negative returns and school districts handing out pink slips for teachers that are making $40K and working harder then these GP's that are holding lunch meetings at private golf country clubs. The interests simply don't line up. The irony is Teachers in the public school system give VC's money and the VC's put their children in private schools. What a joke!!!!! But, humorous. Here's a peak at one the perks of being able to milk management fees from public teachers pension funds. Half the the student body at this school in Menlo (Silicon Valley) is made up of VC children- paying $31,000 per year; http://www.menloschool.org/admissions/tuition_f...
There are some government changes coming down the pike that will change this ridiculous, evil and bloodsucking industry.
@ Matt we've never met. But, when we do, I'll buy you a beer and shot of tequila.
VC invests primarily in startup technology ventures, of course, which few are blaming for our problems today.
(As an aside, this is why understaffed and underpaid public funds have no business doing private investments. The feedback loop is so long as to necessitate deep dives into the portfolio and at public funds, you have neither the people not the time to do it well . . . )
Just like banks are going through a tough time, the VC industry is another industry that requires serious reform and regulations. It's time for more transparency and visibility into what's going on in the VC world.
Thanks again for this great post!
Yeah, there's some conjecture here, but I tried to concede that where there was. no one returns my calls. I'll gladly update if anyone gets back to me with more conflicting data. I'm most surprised by the PR department at Washington State. That woman hasn't returned a single call over three years. I know my messages are getting through, because her executive assistant says she passes them on. But with the Seattle newspapers on the rocks, I'm wondering who will follow up if I don't....
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1998: Median=1.8% Top Quartile=11% Oak=55% -> Way into Top Quartile
1999: Median=-6.6% Top Quartile=0.8% Oak=-4.2 -> 2nd quartile (above average)
2001: Median=1.5% Top Quartile=9.6% Oak=1% -> just below median
2004: Median=-0.7% Top Quartile=12.5% Oak=5% -> 2nd quartile (above average)
So Venturebeat must know that Oak was above average on 3 of 4 funds and just below on one, way above on the last. (Either that or you are negligent for not bothering to check.) Put another way, statistically, Oak's returns are significantly above average for the industry. Yet you still chose to present the data the way you did.
Granted, I wouldn't think that would qualify one to raise the largest funds in the industry, but isn't this data really more of an indictment of the VC industry overall than of Oak? You certainly wouldn't know it from this article. You have lost all credibility with me.
Where are you getting the data? Is it self-reported? Is it comprehensive?
Do you have a name?
Yes, it certainly is an indictment of the VC industry overall.
And what does it mean to be barely above average in an industry that is awful? I think that's a point I was trying to make. Many firms are going under, and here's a firm producing very mediocre returns getting backed year after year -- in part by public money.
Maybe I was too harsh in my language. I agree with what you're saying here overall about the VC industry and the fee structures. And I imagine Oak is just as faultable here as any though I don't know the specifics of their fees. As an aside, I would argue VC comp is on average more aligned with true risk-adjusted performance than either LBO comp or hedge fund comp but they're all problematic. And, yes, VC returns have been pitiful for a decade. But so have public equity returns, and no one is accusing public pension LP of malfeasance for investing in big mutual funds.
What I object to the tone of the article that seems to implicitly impugn the character of the GPs and LPs involved, not just the results. The idea that the only way Oak could have raised their past funds was through "smug relationships" or LP laziness doesn't hold water for me on the basis of the info you've provided. As of 2004, the last Oak fund you report (I don't have their return data only the industry benchmarks so I was just using your figures), one would have seen one great fund in 1998, and probably two that were average or above but too early to tell. It seems what should happen is now happening -- they are being forced to downsize their next fund significantly (and I'd imagine accept tougher terms, too).
The deals you list also seem to be one-sided. Oak has had a few big wins in that time period too, but somehow they weren't mentioned. One could write a similar article slamming Mike Moritz with a lot of conjecture about his big capital base (Sequoia has a lot of money under management, too, if you add up all their vehicles) and mentioning Webvan but it would be way off target without mentioning Google. I'm not saying I'd invest in Oak, but this article doesn't seem neutral or comprehensive.
Looking at venture returns in a period when technology was in the doghouse (time periods ending last summer) is much the same. Pick the right (or in this case, wrong) endpoints and any returns look unimpressive on an absolute basis, and that's what you have done.
You have to look at peer rankings and at long term returns. I was very close to the two founding partners and the bright people they surrounded themselves with and when you realize that, generally, 10% of venture investments are total writeoffs, 80% plod along with very mediocre returns but the other 10% can have 20x or 40x or 100 x returns, it makes little sense to list four or five sour investments when all of your positive return comes from a few tremendous successes.
While I have not been involved with Oak for a while and Greenfield is retired, several of the other key partners are very good, if low key. They communicate with their partners, not the press. Always have and apparently still their policy.
You guys are ignoring the size of the investments. As reported, Washington state poured much more money into the 1999 fund than it did in to the 1998 fund. So while, while the 1998 fund did great, and the state made money ($20M on $16M invested), the state lost much more value on its 1999 investment (as of that story, it had lost $30 million in value on $57 million invested). In other words, you're emphasizing the greatness of the 1998 fund, but this is overshadowed by the fact that that fund was much smaller. More money was caught in the money losing funds.
Next, related to that, it's a little strange to argue support for a firm that is simply losing less money than another median firm, especially when the absolute amounts the firm is investing are so huge. Would you rather invest $10 and lose $15, or invest $2 and lose $4. You can play nice little games with these numbers. Even though my loss on the $2 was two-fold, and thus a greater multiple than the loss on the $10, I'd still prefer that two-fold loss because the dollar amounts are smaller.
Jim, you talk about the partners being very good people. I have no doubt they are. I'm sure they are professionals. This is not a piece about their personalities.
Also, do you really author a blog titled Venture Beat and are not aware of benchmark data from Venture Economics? Makes me question all comments about the industry. Kinda like a sportswriter covering the Mariners asking what ERA stands for.
Why not open up and tell us who you are?
Also, not sure what you mean about not being aware of benchmark data for VE. I'm quite aware of it, and addressed the question above. I think you're missing the point. Oak was smaller in its earlier the years -- it was tight and focused, and thus primed to do better, and especially in 1998, was well-timed for the boom. Oak's 1998 fund was a mere $101 million. Anyone should have made money back then. Companies with no profits, and barely any revenues were going public the following year. Then, Oak chose to raise a fund the following year, in 1999 for $1 billion. And then again in 2001, for $1.6 billion. It plowed all that money into companies that weren't going to do very well. It moved quickly to become a much larger fund, at a ridiculous pace. So yes, it's 1998 fund performed much better than Venture Economics' benchmark, but its contributions were tiny because it had a small fund. Contrast that to the lousy performance on those two later huge funds. Because its funds were larger than the average, the weak performance -- even if was in line with other funds -- is magnified all the more because of the sheer dollar amounts.
Just because someone is top quartile doesn't mean they've done a good job. Top quartile is a fiction that allows people to claim that they're the tallest midget and then give themselves false kudos. Another LP blogged about this fallacy a while back:
http://www.lp2dot0.com/blog/2008/07/tyranny-of-...
So indeed, Matt's article is an indictment of the industry, but the Oak guys have been among the most cynical of its practitioners.
http://kipmcc.wordpress.com/2009/03/21/venture-...
Thanks for letting us know where those fat tax checks we all just wrote are going.
You've got a mission and I owe you a drink.
In the VC world, it's: tell me who you invest with and I'll forecast what your IRR will be.
Check up Oak's link up with Worldview, Crescendo and others over the last ten years.
Any surprise why Oak's returns will be any different from their co-investors (who are all in the deep red)? Who had bad mojo and whose bad mojo affected who else...is left for homework. LPs already voted on that by not investing in funds started by some of those named partnerships so maybe Oak claimed it wasn't their bad mojo but someone else's.
To the list of bad investments noted in the article add those companies Oak invested along with Worldview (OnStor? Commverge? 3Par?...) and others.
It's generally recognized that IRRs are reflective of a fund's overall direction after about five years (firms generally mark up the value of their portfolio companies as they make progress and raise money at higher valuations). Clearly, there are exceptions, but that's the rule. With such massive fund sizes, Oak will have to have some successes merely to break even, so i'd sincerely hope they have some solid companies in their portfolio - and I'm sure they do. True, the reference I made to Oak's deals was indeed selective, not doubt about it.