The venture capital industry has faced significant challenges over the past few years due to macroeconomic conditions. The market downturn has had a profound impact on VC fund performance, leaving investors wondering about the future of their investments.
Recent data from the San Francisco Employees’ Retirement System (SFERS) provides valuable insights into the state of the venture capital market. SFERS’s venture portfolio recorded an internal rate of return (IRR) of -0.9% last year through the third quarter, according to data from the pension fund’s May 8 meeting.
A Look at SFERS’s Venture Portfolio Performance
The data highlights that the venture portfolio recorded a 48.8% IRR in 2021 and a -19.9% return in 2022. It is essential to note that these figures include all the venture funds in the portfolio, regardless of their lifecycle stage and deployment status. This means that the numbers account for funds still deploying capital, as well as those nearing maturity.
What Do These Numbers Tell Us?
While the data does not provide a detailed picture of each fund’s individual performance or how funds nearing maturity are doing specifically, it does indicate that overall fund performance is down. The metrics also suggest that the venture funds reaching maturity in SFERS’s portfolio are not returning capital at a rate high enough to overcome the losses of newer fund commitments.
Comparing Performance Across Years
Comparing numbers from 2022 and 2023 to a year like 2021, which saw a 22.3% IRR, is an exercise in comparing anomalies. In a more "normal" year for venture, such as 2018, SFERS recorded a 22.3% IRR. This indicates that despite having at least 20 funds still in their investment period, the overall performance of the funds reaching maturity was solid.
Is the Industry Already Recovering?
SFERS’s performance shows that the industry may have already hit rock bottom and is on its way to being back to normal. While the pension fund still reported negative IRR in 2023 (-0.9%), it is a positive signal compared to 2022’s -19.9%. This data is particularly worth paying attention to because SFERS is an active venture LP, with a sizable $3.6 billion venture portfolio diversified across emerging and established managers.
SFERS: A Longtime Backer of Big-Name Managers
SFERS has been investing in the asset class for longer than many of its pension fund peers and has amassed a significant venture portfolio. The organization is a longtime backer of big-name managers, including Notable Capital ($273 million invested), NEA funds ($250 million), and Mayfield ($69 million).
Recent Commitments Despite Performance
Despite the recent performance, SFERS has not deterred from investing in the asset class. In 2023, the pension fund made 15 commitments to venture funds, and this year has already seen two commitments: a $75 million commitment to IVP XVIII and a $40 million commitment to Volition Capital Fund V.
Conclusion
While venture funds do not seem on track to knock it out of the park this year in terms of performance, the worst of the downturn’s effects may already be behind us. The recent data from SFERS provides valuable insights into the state of the venture capital market and suggests that the industry is recovering from the challenges faced over the past few years.
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About the Author
Rebecca Szkutak is a senior writer at TechCrunch, covering venture capital trends and startups. She previously covered the same beat for Forbes and the Venture Capital Journal.
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