Top VC Firms Have Great Returns…Right?

CalPERS did everything right. It won access to some of the finest venture firms: NEA, Khosla. The returns? Terrible.

Get the blog before anyone else…subscribe!

New data is pulling back the curtain on VC returns. For the $440 billion California pension fund, many venture investments have notched poor results.

From a report out this morning in Business Insider:

The CalPERS fund’s $75 million bet in 2001 on a venture fund managed by the Carlyle Group lost money. That same year, the $75 million it invested in a fund from the VC giant New Enterprise Associates yielded a dismal internal rate of return of 2.7%. A $25 million investment in DCM’s 2000 fund had a 1.9% IRR. 

Its $260 million investment in two Khosla Ventures funds in 2009 yielded an IRR of 11.8% for the early-to-midstage fund and 6.9% for the seed-stage fund. Those figures were both below the 14.7% benchmark for that year…

A fund that returns about 2.3x qualifies for the elite, top quartile. Over a 10 year fund life, that’s around 9% a year.

The funds CalPERS invested in badly missed their benchmarks.

What Went Wrong?

I have a few theories:

1) Adverse selection.

CalPERS has to report the returns of the funds it invests in. This means it’s locked out of some of the very best firms.

Again from Business Insider:

It did not help that CalPERS was locked out of top firms like Sequoia, Benchmark, and Accel because they did not want their performances publicly disclosed in filings. 

2) Too much money. Nice problem to have, right?

Not always.

You often get higher returns by investing in smaller, early stage funds.

But a startup that’s barely off the ground only needs so much cash. Give them $100 million, and they won’t know what to do with it.

This means that you can only put so much capital to work at the early stage.

But CalPERS has billions to deploy! They’ll never get there by giving $5 million at a time to little seed funds.

This pushes them to the late stage and locks them out of some of the best returns.

3) Rotten valuations. CalPERS investments in 2001 did particularly poorly.

The NASDAQ started falling in early 2000. But it didn’t bottom out until late 2002.

Meanwhile, growth stage startups generally follow the NASDAQ with a lag. So those valuations may not have bottomed until 2003 or later.

This means that for many of the later stage investments CalPERS made, the prices were likely inflated.


So, should we run like hell from venture? Not quite.

Venture returns are still higher than any other asset class.

But CalPERS has only invested in a very small number of venture funds. They haven’t placed enough bets to hit a winner.

Institutions should invest in more funds across vintages. Some are laggards, but others shoot the lights out.

You have to stay at the table long enough to win.

What do you think of investing in venture capital?

Leave a comment and let me know!

More on tech:

The Hard Thing About Hard Things

How I Decide to Double Down

From Design to Code in Seconds with AI

Get the blog before anyone else…subscribe!

If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog! 

Save Money on Stuff I Use:


This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order. 

Photo: Khosla Ventures founder “Vinod Khosla” by jdlasica is licensed under CC BY 2.0.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s