The Life of a VC Fund
How Long Is a VC Fund Investment Really?
The popular belief is that a VC fund investment is 10 years long. 10 years is a long time so for anyone outside the industry, it intuitively makes sense. A couple of years to start the companies, a couple more years to grow the companies and finally a final few years to exit the companies. But to say that a fund investment is 10 years is misleading at best.
Data that I have seen puts the average fund life at ~15-16 years. Indeed, I’ve seen residual values companies in funds dragging funds into their 20+ years. Oftentimes these companies are worth something so they continue to chug along. The problem is that they are not producing anything valuable enough for anyone to actually acquire them. So the fund chugs on continuously. But I disgress.
Obviously getting a sample size of funds that is big and old enough to use to determine the median/average life of a fund is really hard. Those that have it obviously don’t want to share it publicly. So to publicly do this, I’ve come up with a simple way to look at the life of a fund. You can find the spreadsheet here.
Methodology
Source: Pitchbook Q2 2023 benchmarks
My methodology here is really simple. I’ve computed the years since the vintage to 2023. In other words, a 2010 vintage will have 13 years of elapsed time since that vintage start.
The “Percentage to Full DPI” is DPI over TVPI. From there, the green is funds within a category that are fully realized. So the worse performing fund in the top decile is green, then presumably that funds that are better than it, are also fully realized. In yellow are funds that are 90%+ fully realized. Again, same logic applies here: a category in yellow means that the worse performing top quartile fund is at least 90% realized, meaning that all the better ones are fully realized. Now, what can happen is that the category of top decile is yellow but that the top quartile is green. That just means the top decile funds performed better on a DPI basis but that they are slower to fully realize the fund.
Results
What this exercise shows is that from this sample of funds, it takes about 20 years to fully realize a vintage of funds. It also shows that it takes 16 years for 90%+ of a fund’s value to be realized. In other words, a VC fund investment is not 10 years; 10 years gets you a two thirds of the way there. 10 years hopefully gets you to 1x DPI and more.
Caveats
Obviously this is done using data at a static moment in time so it’s not definitive. TVPI also moves and changes so DPI could take more or less time. That said, the data above tracks with other private fund data that I have seen. I assume that if we were to go back and do this exercise at different points in time, we would get a similar result.
What About Just Cost?
The other way to view the 10 year life of a fund investment is that 10 years gets you back cost and a little more. Again, this sample and snapshot suggest that it takes about 8 years for the top quartile of funds to return 1x DPI and 8-9 years for the median fund. That said, I don’t want to put too much emphasis on this given that the 2010-2017 vintages are some of the strongest vintages per the Pitchbook data.
The top decile funds are able to return cost in about 5 years, which is very quick. That said, given the recency of the 2018 vintage and the covid boom, it’s hard to make a definitive conclusion based on just this. Particularly because the 2018 vintage did really well while the 2019 is very far from 1x DPI. Plus for still young funds, a high DPI doesn’t mean anything without the context of the percentage of capital called.
Conclusions
The snapshot data seems to suggest that the average fund life tracks more on the 16 year time frame than the often sold 10 year fund life of a VC fund. 16 years is 4 full years more than your typical 10 years + 2 year extension of a fund. To say that a venture fund is a 10 year commitment is not actually true. The data suggest that on average, it’s closer to half a decade more.
If you have comments, questions, or criticism, message me on Twitter @Lawrence_Ou and I’m happy to chat and discuss! I do put a lot of time into this so if you found this useful, please consider subscribing.
None of the above should be considered fund advice, investment advice, financial advice, or legal advice. It is strictly for informational purposes and is accurate to the extent of the author(s) knowledge. The views and writings above are strictly those of the author(s) and do not in any way represent the views of past or present employers.