Is the J-curve a myth?
It very definitely exists, but under two specific constraints: (1) we need to be talking about ‘traditional’ venture funds, and (2) we need to limit the discussion to the top half/top quartile funds that actually make money.
The unbelievably seismic changes resulting from exponentially advancing technology mean that the ‘traditional’ venture world is rapidly giving way to a new world of micro-VC, “super angel”, early-stage seed funds, which have very different economics. With many of today’s web-based startups, a relatively small amount of funding up-front, combined with rapid development time, a non-existent IPO market for smaller companies, and an insatiable acquisition appetite from larger companies means that companies are both failing faster and exiting faster, by almost an order of magnitude, than was previously the case. Because of this, the new breed of seed and early-stage funds are in many cases completely bypassing the down-swing of the J curve.
On the other hand, the sad fact is that the majority of traditional venture funds formed in the past decade have simply not made enough money to return a profit to their investors. In those cases, the down-swing of the J curve is very real, but they are missing the up-swing. This is because the lack of an IPO market means that unless they were fortunate enough to be in Facebook, Groupon, LinkedIn, Instagram or a couple of other mega-home-runs, they simply have not had enough large-scale positive exits to get back north of the baseline.
*original post can be found on Quora @ : http://www.quora.com/David-S-Rose/answers *
Written by David S. Rose
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