Venture Capital

Why Only 12% of VCs Can Be Considered Successful. Max.'

Jason Lemkin

Screen Shot 2015-06-06 at 3.10.25 PMContinuing our recent series on The Catharsis in Understanding How VC Really Works, it was only recently, spurred by Quora, I really thought through just how many VC partners can really be considered a success.

Turns out math says it can’t be that many.  No matter how it may look from the outside.

Why? Well…

1.  The top ‘quartile’ of funds since Web 1.0 have returned about 20% IRR and 2x returns net of fees. On paper, that’s probably gone up a lot recently with the Rise of Unicorns and growth of Nasdaq, but 20% IRR is still a good basic yardstick for Top Quartile results.  You can argue the exact numbers, but they’re close enough for the analysis.

2.  Now, 20% IRR and 2x cash returns net of fees — the Top Quartile of VC firms — turns out is sort of barely good enough.  Because venture capital is sooo illiquid.  If an LP (the folks that invest in VCs) can get 20% IRR from Private Equity (which has a 2-5 year path to liquidity) … why do VC?  No point.  Even worse, if that LP made 20% in instantly-liquid Nasdaq the past few years… VC can seem pointless as an asset class.

So let’s say really only the top 15-20% of VC funds have ‘good enough’ returns to merit another fund.  Let’s be generous and call it 20%.

And if you don’t generate these sorts of returns — your VC firm dies.  Because your investors (the LPs) won’t write you another check for the next fund.

3.  But the math for ‘success’ is worse, because it turns out, returns are very bimodal at almost all VC firms across their partnerships.  In other words, most VC firms have just 1 or 2 partners that drive the vast majority of the returns.  The rest often have negative returns, or barely return 1x.  It’s hard to tell from the outside, but that guy that did WhatsApp… the guy that did Facebook… etc. etc.  It’s that guy.  Not a firm.  See what other deals he or she did… you’ll usually see a lot of hits.   Only a small subset of VC partners manage to successfully invest in Unicorns early, let alone repeatably.

Let’s be generous and say 1/3 of VC partners have ‘good’ returns at the 20% of VC firms that deliver ‘good enough’ results … > 20% IRR and > 2x net of fees.

4.  So let’s just take 20% (% of VC firms with good enough results) and multiply by .333 (% of partners at these firms that actually drive returns) = 6.6%.

Now, this isn’t totally fair.  There can be, and are of course, partners at VC firms where the other partners just weigh them down so much, that on average, the VC firm doesn’t hit this hurdle for “good” returns.

So maybe let’s almost double that 6.6% to 10%, maybe 12% if we are generous, to account for great partners stuck in sub-par firms.  I.e., they have strong individual results over many years, but the VC firms themselves don’t.

So 6-12% of VCs are actually ‘successful’.  The rest are failing.  No matter it how may look at breakfast at Madera.

>> It’s a high bar.  If it makes you feel any better.

And maybe, you can understand the psychology of VC just a tiny little bit better.  What risks and why they take them, when and where.

[And to be clear — I’ve proven nothing at all myself, but paper mark-ups.  So Face East for me, when you have a moment.  I don’t want to get stuck in the Bottom 88% 🙂 ]

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Published on June 10, 2015


  1. On point#2- The intrinsic assumption that, these returns are guaranteed in a particular asset class and hence other asset class, such as VC in your example, isn’t always true. Every asset class has cyclical distribution pattern, some that follow macro trends and other that follow business cycles. VC being on the latter side. You mentioned PE funds returning Net IRR of 20% or more, sure. But the harsh reality grappling PE funds is that they have no deal flow. PE asset class is historically notorious about having excess dry powder sitting on the sidelines. So sure, you want to put money to work, assuming it’s going to get you the returns. But where’s the deal flow ??

    It doesn’t change the tone of your article, but I am merely pointing out that other asset classes have issues as well. And which is why LPs are always evaluating their allocation strategies.

    1. Yes I am oversimplifying a bunch of nuances on that point. Though I think it still summarizes LP sentiment and ties to the overall math.

  2. Thanks for sharing, I find this very valuable and frustrating at the same time.

    My expectations from a successful VC – I find “capital partner” a more appropriate term – are that he\she will help the founding team push the company forward by opening doors, by helping to recruit top-notch talent, and by preventing the managing team from making huge mistakes. In other words, help my co-founders and me to extend our own capabilities and reach, not replace them. If I can’t have that, I’d be happy to settle for an investor who doesn’t get in the way, someone with neutral impact on the company.

    If a VC is successful and gets great returns on his investments, does it necessarily mean that he\she is also a good capital partner as described above? I would love to get your thoughts on this.

    1. Agree 100%. A VC that doesn’t get in the way is the back-up plan. Best is someone that can actually help, even if just a bit. Because you only get a few chances to sell stock, might as well pick best partner.

      Anyhow at a higher level, all that makes a VC a “success” is returns. Irrespective of how he gets them. There’s some tension there.

  3. Your paper-napkin math is just fine for me. Better than the typical formula for IRR:

    0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n

    Which isn’t too difficult but hurts my eyes. Even at 6% it’s still compelling. The possibility of doing it right is what excites me the most.

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