How profitable is venture capital? V2

 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), GP (VC fund General Partners), 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 V2

What are the critical learnings in this article?

• The median VC funds had returns about 3% higher than the public market indices. Picking the right VC GPs is critical to better performance than a public market index.
• Past performance is the best predictor of future performance. Past performance does not 100% guarantee future performance.
• The VC markets have undergone massive change in the past 20 years.
• The future environment for VC GPs will be different from the past, turbulent and with regular new challenges.
• There won’t be fact-based analysis of the impact AI on GP Direct Alpha performance for several years.

How do you read this article?

This article uses Direct Alpha as the measure of GP performance. See Appendix A for a definition of Direct Alpha.

How profitable have VC GPs been for their LPs? ¹

The median VC funds had returns about 3% higher than the public market indices.

• 25% of VC funds annual returns10% (or more) higher than public market indices.
• 25% of VC funds had annual returns at least 4% lower than public market indices.

Picking the right VC GPs is critical to better performance than a public market index.

 How can you predict future performance of VC GPs?

Past performance is the best predictor of future performance.  Past performance does not 100% guarantee future performance.

• Interim results of current fund have generated Direct Alpha. “Persistence is also apparent using the interim performance of the previous fund…at the time of fundraising. This persistence translates into economically significant benefits of using interim performance data available to LP Investors.” ²
• When VC GPs introduce new funds, the performance is broadly in line with their established funds. ²
• Funds that are in the bottom quartile tend to stay there. ³
• Fund size below $250 million US. ⁴
• The GP has been a successful prior founder. “The outperformance of successful founder-VCs is consistent with them adding more value post-investment” ⁵

How have the VC markets changed?

The VC markets have undergone massive change in the past 20 years.

• Massive growth in total assets under administration from $521 billion US in 2006 to $5.7 trillion in 2025
• Time to liquidity has extended e.g. average time to IPO is up to 14 years,
• GPs have difficulty in achieving exits e.g. Late 2024 had $3.6 trillion of unrealized value.
• The secondary market was small in early 2000s but is now a major source of exits.
• Net asset loans (i.e. borrowing against the unrealized value) by GPs were small in early 2000s but are now a major way for GPs to provide distributions to LPs.
• GPs have started to use line of credit to reduce or change the time of credit calls. This impacts IRR and Direct Alpha calculations and may also change the decile ranking of a fund.

What are the future uncertainties VC GPs face?

The future environment for VC GPs will be different from the past, turbulent and with regular new challenges.

• Will there be a pickup in demand for exits of VC portfolio companies?
• How long will investors continue to put cash into continuation funds?
• Do VC funds as a whole have too much capital invested in portfolio companies?
• How will geopolitical, demographic, and technology changes impact the creation of valuable portfolio companies?
• Are there any limits to the number and size of valuable portfolio companies which can be launched?

What will be the impact of AI on GP performance?

There won’t be fact-based analysis regarding the impact of AI on GP Direct Alpha performance for several years.

What are your next steps? – as an LP

• 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.
• Do fact-based analysis on current and relevant information. The internet is swamped with opinions, obsolete data, and misinformation.
• Create a range of future scenarios.
• Define the talent characteristics of GPs that will be successful in the unpredictable turbulent future.
• Assess potential VC GPs based upon the above 4 steps,

Footnotes

¹ 2026 02 17 Vanguard,”An optimistic but measured outlook for private equity”, Vanguard Workplace Solutions

https://workplace.vanguard.com/insights-and-research/perspective/an-optimistic-but-measured-outlook-for-private-equity.html

² 2023 08 01 Robert S. Harris, Tim Jenkinsoin, Steven N. Kaplan, and Ruediger Stucke, “Has persistence persisted in private equity? Evidence from buyout and venture capital funds”,Journal of Corporate Finance, August 2023 Volume 81, Page 15

https://www.sciencedirect.com/science/article/pii/S092911992300010X

³ 2020 11 01 Robert S. Harris, Tim Jenkinsoin, Steven N. Kaplan, Ruediger Stucke, “Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds”, Working Paper 2020-167, The University of Chicago, Page 13]

https://bfi.uchicago.edu/wp-content/uploads/2020/11/BFI_WP_2020167.pdf

⁴ 2026 05 29 Sonali Basek, Nirali Patel, Aaron Schwartz, and Dan Suzuki, “Chasing outliers:  Venture Capital in the AI Era”, iCapital

https://icapital.com/insights/investment-market-strategy/chasing-outliers-venture-capital-in-the-ai-era/

⁵ 2022 04 01 Paul A. Gompers and Vladimir Mukharlyamov, “Transferable Skills? Founders as Venture Capitalists”, National Bureau of Economic Research Working Paper 29907

https://www.nber.org/system/files/working_papers/w29907/w29907.pdf

 What further reading should you do?

Your company will fail. Koor and Associates

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

How profitable is Private Equity? Koor and Associates

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

Appendix A – What is Direct Alpha?

Direct Alpha is the annualized return of a fund over a public market index (e.g. S&P 500).

• Direct Alpha is calculated using the specific cash flows of an LP in and out of a fund. These dates and dollars amounts are used to determine hypothetical purchases and sales of a public market index
• Direct Alpha also includes the Net Asset Value of the fund, which is the value of unsold assets.

Direct Alpha measures the annual percentage return above or below the benchmark the LP would achieve.  A Direct Alpha of 0% means the investor received the same return as if they had bought and sold the public market index. A direct Alpha of 5% means the investor received an annual return 5% higher than the public market index.

Why not use the IRR reported by funds?

• The IRR reported by funds does not represent the annual % cash returns the LP would achieve over the lifetime of the fund.
• The IRR can also be manipulated by funds to generate high values.

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