How profitable is venture capital?

 What is the purpose of this article?

This article enables a discussion regarding the profitability of VC (Venture Capital) funds. The focus is on traditional VC funds with a fixed liquidation date.  The article scope excludes: evergreen and perpetual funds.

The audience for this article includes: LPs (Limited Partners), VC fund managers, and VC fund portfolio companies.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: How profitable is Venture Capital

What are the critical learnings in this article?

• If you were good at predicting which fund managers would be successful, you could have had excellent returns. But many Limited Partners LPs lost money from their investments.
• The trend has been that the % of funds providing any cash return has been declining.
• I have read multiple articles that some LPs have started to question VC fund managers who are showing high IRR results (which include both actual realized returns and estimated future unrealized returns) while the LPs are receiving little or no cash because the fund managers are unable to sell their investments to buyers.

What types of companies get VC investments and why?

• The company has gone past the startup stage. The company has found a repeatable, scalable, and profitable business model with lot of potential customers who are willing and able to pay to solve their problems and needs. The company has found a profitable solution to scale.
• Investment is needed to quickly grow the company.
• The company may show losses (both from a cash flow and accounting perspective) due to the focus on lifetime customer profitability.
• The number and size of fundraising rounds has nothing to do with whether or not a company is in the VC stage. Some companies have raised more than a billion dollars, never left the startup stage, and shut down.
• A company may slip back into the startup stage at any point in its life.

How many years does a VC fund exist before it is liquidated, all of its investments sold, and cash distributions to LPs completed?

• I’ve often read that a VC fund lasts for 10 years. But what are the facts.
• Only 7 % liquidate within 10 years. Median funds takes slightly longer than 14 years. 46% take 15 years or longer.¹

How profitable have VC funds been?

If you were good at predicting which fund managers would be successful, you could have had excellent returns. But many LPs lost money from their investments.

 

Let’s look at the IRR for funds that were launched at least 15 years before the report date.

#1 US VC report published in 2017.²

What have been the IRR results for find launched in each year from 1988 to 2000?

If you were good at predicting which fund managers would be successful, you could have had excellent returns. But many LPs lost money from their investments.

The yearly IRR for the combined assets of all funds ranged from: -0.89% to 100.83%

The yearly median fund IRR ranged from: -3.76% to 41.65%

The yearly lower quartile IRR ranged from: -11.58% to 21.54%

The yearly upper quartile IRR ranged from: 3.20% to 80.62%

 

#2 US VC report published with data up to 2023 ³

What have been the IRR results for find launched in each year from 2000 to 2010?

The yearly IRR for the combined assets ranged from: -0.65% to 15.4%

The yearly median fund IRR ranged from: -0.35% to 12.84%.

The yearly bottom quartile IRR ranged from: -10.39% to 4.69%

The yearly upper quartile IRR ranged from: 4.65% to 22.87%

What will be the returns for recently launched funds?

• No-one can predict the future.
• The trend has been that the % of funds providing any cash return has been declining.
• I have read multiple articles that some LPs have started to question fund managers who are showing high IRR results (which include both actual realized returns and estimated future unrealized returns) while the LPs are receiving little or no cash because the funds managers are unable to sell their investments to buyers.

Based on Q1 2025 results, what has been the approximate % of VC funds which provided any cash returns?⁴

What have been the results for funds 3 years after launching?

• Funds launched in 2017: 33%
• Funds launched in 2018, 2019, 2020 – all about 22%
• Funds launched in 2021: 10%

What have been the results for funds 4 years after launching?

• Funds launched in 2017: 52%
• Funds launched in 2018, 40%
• Funds launched in 2019, 32%
• Funds launched in 2020: 28%

What have been the results for funds 5 years after launching?

• Funds launched in 2017: 70%
• Funds launched in 2018, 43%
• Funds launched in 2019, 35%

What are your next steps?

• Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people.
• Define your long-term cash flow requirements and plan, with scenarios.
• Determine your asset allocation over time.
• Do your own fact-based research.

Footnotes

¹ The New Reality of the 14-Year Venture Capital Fund, Institutional Investor, Feb 19, 2015

https://www.institutionalinvestor.com/article/2bsv31916hb46dpp501ds/portfolio/the-new-reality-of-the-14-year-venture-capital-fund#:~:text=Venture%20capitalists%20structure%20and%20market,than%2014%20years%20to%20end.

² Page 13 US Venture Capital Index and selected benchmark statistics Dec 31, 2017, Cambridge Associates

https://www.cambridgeassociates.com/wp-content/uploads/2018/05/WEB-2017-Q4-USVC-Benchmark-Book.pdf

³ 2024 Q4 Venture Capital Pitchbook Benchmarks , Page 12

https://pitchbook.com/news/reports/q4-2024-pitchbook-benchmarks-with-preliminary-q1-2025-data

⁴ Q1 2025 VC Fund Performance Report – Carta

https://carta.com/data/vc-fund-performance-q1-2025/

 

 

What further reading should you do?

LP (Limited Partner) assessment of a fund.  Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/lp-limited-partner-assessment-of-a-fund/

Your company will fail. Koor and Associates

https://koorandassociates.org/avoiding-business-failure/your-company-will-fail-v1/

How profitable is angel investing? Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-is-angel-investing/

How profitable are search funds? Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-are-search-funds/

How profitable are search funds? V3

 What is the purpose of this article?

Help investors think about whether to invest time and money into the search fund asset class.

The audience for this article includes: investors considering search fund investments, and search fund founders.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: How profitable are search funds V3

What are the critical learnings in this article?

• The IRR for traditional search funds in Canada and the US has been 35.2%.
• To make a profit by investing in search funds, you need the ability to predict which people (searchers or managers of funds which invest in searchers) have the talent to be successful.
• 66% of search funds with an investment return, lost some or all their investor money. A small number of search funds generated much of the IRR return e.g. 8 exits had IRRs of 100% or more.
• You may need to fund between 30 to 45 searchers, to have a high chance of approaching the IRR for the asset class as a whole.

What is a search fund?

What is a traditional search fund?¹

An investment vehicle formed by one or two entrepreneurs (i.e. “searchers”) along with investor mentors.  They search for, acquire, and lead a privately held company for the medium to long-term. The searcher and investors exit at that time.  Investors fund the search costs and the acquisition costs.  The entrepreneur becomes the CEO after the acquisition.

• These investors are very actively involved as: coaches, mentors, advisors, and board directors. The investors do far more than provide capital.
• The searchers typically have an MBA.
• The searchers search for a private company to acquire, lead, grow, and sell.
• It takes 2-6 months to find the investors and capital to launch the search fund.
• The search takes 12-24 months.
• Growing the value of the company takes 4 to 7 (or more) years.
• The exit process takes 6 months.

What are alternative search fund models?²

• Self-funded search: the searcher funds the search themselves, without investors.
• Single investor model: only one investor e.g. single professional investor, family office, private equity firm, etc.
• Long-term hold: hold for more than 10 years.

 How profitable has the search fund asset class been

The following metrics are for the U.S. and Canada

• 681 traditional search funds formed from 1984 through to Dec 31, 2023³

The IRR has been: ⁴

• 1% for all investments made, and 33.0% if the top 5 companies were excluded.
• These IRR returns have been relatively constant from 2008 to 2023.
• A small number of search funds generated much of the IRR return e.g. 8 exits had IRRs of 100% or more.⁵

66% of search funds with an investment return, lost some or all their investor money. (See Appendix 1)

How many search funds do you need in your portfolio?

You need a large number of search funds in your portfolio. Why?  Many funds lose money with their acquisitions or have poor returns.  You need a large number to reduce the risk of too many poor performing funds.

A Monte Carlo simulation of search fund performance suggests a portfolio size of 20 to 30 funds that have made acquisitions.⁶ Given that 37% of search funds don’t make an acquisition, you’d need to fund between 32 to 48 searchers, to have a high chance of approaching the IRR for the asset class as a whole.

What is the capital you require?

The following is my brief analysis of the capital you require for your search fund portfolio to approach the IRR returns of the asset class as a whole.

• As an investor, your initial search fund investment might range from $25,000 to $50,000. Funding 32 to 48 searchers would require from $800,000 to $2,400,000.
• Additional funds would be required to support acquisitions.
• In the traditional search fund model, you must provide much more than capital: you need the skills and knowledge to: coach, mentor, advise, and deliver value on the boards of search funds.

If you have a small portfolio, you have a high chance of returns below the asset class as a whole.

What are your next steps?

• Review your investment thesis, asset allocation, and investable assets to determine if you have the capital to create a portfolio of search funds.
• Assess your skills, experience, relationships, capabilities, and time availability to determine your potential to coach, mentor, and provide value as board director.
• Consider if you’ll create and manage a portfolio of search funds OR if you’ll invest in a fund which has a large portfolio of search funds.
• If you’re considering investing in a fund with a portfolio of search funds, you should: Build a financial model which considers the fees and exit times of the fund; and create a due diligence process to assess the fund’s: talent, processes, business model, and historical results.
• Regardless of the path you decide to take you must also assess the talent of the other investors. Why? The success of the traditional search fund model depends on the ability of the other investors to provide value via coaching, mentoring, and board directorships.

Footnotes

¹ Sara Heston and Peter Kelly, “2024 Search Fund Study – Research Overview”, Stanford Graduate School of Business. Page 3

https://www.gsb.stanford.edu/faculty-research/case-studies/2024-search-fund-study

² Ibid., 27

³ Ibid., 4

⁴ Ibid., 8

⁵ Ibid., 21

⁶ Andrew Locke, Diversification in search fund investing: The only free lunch?

https://www.linkedin.com/pulse/diversification-search-fund-investing-only-free-lunch-andrew-locke/

 What further reading should you do?

Stanford Graduate School of Business – search fund primer

https://www.gsb.stanford.edu/experience/about/centers-institutes/ces/research/search-funds/primer

Search Funds – What has made them work? Rob Johnson, IESE

https://media.iese.edu/research/pdfs/ST-0357-E.pdf

International Search Funds – 2024 – Selected Observations, IESE Business School, University of Navarra

https://www.iese.edu/media/research/pdfs/ST-0658-E

 

Appendix 1

Data is from “2024 Search Fund Study – Research Overview”, Stanford Graduate School of Business.” Page 5

681 search funds raised.  Relatively small investment made by some combination of investors and the searcher.

7 raised capital but then changed direction away from a search fund

674 raised capital to follow search fund direction

150 still searching – no financial result at this point.

166 still operating – no financial results at this point

316 funds with no financial result yet,

358 have a financial result.

196 exited with no acquisition – relatively small initial investment lost.

40 did acquisition but had negative return

236 lost some or all of investment 122 had positive return

66% of investment made (236/358) lost some or all of the investment

How profitable are search funds? V2

 What is the purpose of this article?

Help investors think about whether to invest time and money into the search fund asset class.

The audience for this article includes: investors considering search fund investments, and search fund founders.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: How profitable are search funds V2

What are the critical learnings in this article?

• The IRR for traditional search funds in Canada and the US has been 35.2%.
• Traditional search fund investors provide far more than capital. They also provide coaching, mentoring, board directorships.
• You need to fund between 30 to 45 searchers, to have a high chance of approaching the IRR for the asset class as a whole.

What is a search fund?

What is a traditional search fund?¹

An investment vehicle formed by one or two entrepreneurs (i.e. “searchers”) along with investor mentors.  They search for, acquire, and lead a privately held company for the medium to long-term. The searcher and investors exit at that time.  Investors fund the search costs and the acquisition costs.  The entrepreneur becomes the CEO after the acquisition.

• These investors are very actively involved as: coaches, mentors, advisors, and board directors. The investors do far more than provide capital.
• The searchers typically have an MBA.
• The searchers search for a private company to acquire, lead, grow, and sell.
• It takes 2-6 months to find the investors and capital to launch the search fund.
• The search takes 12-24 months.
• Growing the value of the company takes 4 to 7 (or more) years.
• The exit process takes 6 months.

What are alternative search fund models?²

• Self-funded search: the searcher funds the search themselves, without investors.
• Single investor model: only one investor e.g. single professional investor, family office, private equity firm, etc.
• Long-term hold: hold for more than 10 years.

 How profitable has the search fund asset class been

The following metrics are for the U.S. and Canada

• 681 traditional search funds formed from 1984 through to Dec 31, 2023³

The IRR has been: ⁴

• 1% for all investments made, and 33.0% if the top 5 companies were excluded.
• These IRR returns have been relatively constant from 2008 to 2023.

66% of search funds with an investment return lost some or all their investor money.

The following analysis is based on the data in “2024 Search Fund Study – Research Overview”

524 search funds have concluded

358 search funds have an investment return to investors. This excludes search funds that were still operating.

196 lost all investor money, due to no acquisition

162 exits 40 of which were negative

236 search funds (of the 358 with an investment return) lost some or all their investor money

How many search funds do you need in your portfolio?

You need a large number of search funds in your portfolio. Why?  Many funds lose money with their acquisitions or have poor returns.  You need a large number to reduce the risk of too many poor performing funds.

A Monte Carlo simulation of search fund performance suggests a portfolio size of 20 to 30 funds that have made acquisitions.⁶ Given that 37% of search funds don’t make an acquisition, you’d need to fund between 32 to 48 searchers, to have a high chance of approaching the IRR for the asset class as a whole.

What is the capital you require?

The following is my brief analysis of the capital you require for your search fund portfolio to approach the IRR returns of the asset class as a whole.

• As an investor, your initial search fund investment might range from $25,000 to $50,000. Funding 32 to 48 searchers would require from $800,000 to $2,400,000.
• Additional funds would be required to support acquisitions.
• In the traditional search fund model, you must provide much more than capital: you need the skills and knowledge to: coach, mentor, advise, and deliver value on the boards of search funds.

If you have a small portfolio, you have a high chance of returns below the asset class as a whole.

What are your next steps?

• Review your investment thesis, asset allocation, and investable assets to determine if you have the capital to create a portfolio of search funds.
• Assess your skills, experience, relationships, capabilities, and time availability to determine your potential to coach, mentor, and provide value as board director.
• Consider if you’ll create and manage a portfolio of search funds OR if you’ll invest in a fund which has a large portfolio of search funds.
• If you’re considering investing in a fund with a portfolio of search funds, you should: Build a financial model which considers the fees and exit times of the fund; and create a due diligence process to assess the fund’s: talent, processes, business model, and historical results.
• Regardless of the path you decide to take you must also assess the talent of the other investors. Why? The success of the traditional search fund model depends on the ability of the other investors to provide value via coaching, mentoring, and board directorships.

Footnotes

¹ Sara Heston and Peter Kelly, “2024 Search Fund Study – Research Overview”, Stanford Graduate School of Business. Page 3

https://www.gsb.stanford.edu/faculty-research/case-studies/2024-search-fund-study

² Ibid., 27

³ Ibid., 4

⁴ Ibid., 8

⁵ Ibid., 5

⁶ Andrew Locke, Diversification in search fund investing: The only free lunch?

https://www.linkedin.com/pulse/diversification-search-fund-investing-only-free-lunch-andrew-locke/

 What further reading should you do?

Stanford Graduate School of Business – search fund primer

https://www.gsb.stanford.edu/experience/about/centers-institutes/ces/research/search-funds/primer

Search Funds – What has made them work? Rob Johnson, IESE

https://media.iese.edu/research/pdfs/ST-0357-E.pdf

International Search Funds – 2024 – Selected Observations, IESE Business School, University of Navarra

https://www.iese.edu/media/research/pdfs/ST-0658-E