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I can’t spend unrealized gains

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Earlier this week the Wall Street Journal published an article claiming that the celebrated venture capital firm Andreessen Horowitz was lagging behind its elite peers in terms of returns.

The firm then responded with a well-written blog post explaining why this accusation is off the mark. Their response was simply that you can’t measure returns on “unrealized gains.” Until there is a liquidity event – that is, the company gets sold or goes public – it’s just paper returns. And what matters is cash. 

As the post clearly states: “I can’t spend unrealized gains.”

But beyond just a rebuttal, the blog post is a great primer on how the venture capital industry works. We talk a lot about the tech space on this blog, so I thought some of you might find it interesting. 

One of the reasons I like to follow the VC space is that there are many similarities to real estate development. Not only in the way that the funds are structured, but also in the way that the gestation periods are incredibly long.

The post talks about this as a “J curve.” In the early years of a fund, the returns are negative. Money is going out the door to invest in immature and risky startups. And it’s not until the harvesting period (7+ years later) that the realized gains start getting paid out to investors (LPs).

It’s also interesting to note that the exit timing for companies – at least according to Andreessen Horowitz – seems to be increasing (10+ years). This is yet another similarity to real estate development where it seems to be getting harder and harder to build and deliver new supply.

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