Explaining Southern California's economy

CalPERS just struck fear in the hearts of venture capitalists everywhere

Max Whittaker/Getty Images

The California Public Employees' Retirement System in Sacramento, California. The fund may severely cut back its venture capital investments.

CalPERS, the gigantic California public workers' pension fund, has announced that it's going to to review the venture-capital component of alternative investments in its $230-billion overall portfolio. This follows on the heels of a much-discussed paper put out by the Kauffman Foundation earlier this year, in which the organization — which is devoted to promoting entrepreneurship — revealed that its VC investments has seriously underperformed in the past decade.

I wrote a feature about this in May. In January, CalPERS announced that it made only a 1.1-percent return on its investments, missing its target return of 7.75 percent by a wide margin. One of the reasons it in alternative asset classes like VC in the first place is that it can't meet its return objectives otherwise.

The fundraising aspect of being a VC has gotten pretty challenging. Some VCs seem to be adapting to this "new normal," while others appear content to live at the top of the pile and uses their brand-name status to vacuum up most of the available money. But they all rely on large funds like CalPERS to fuel their efforts to find the next Google or Facebook.

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Good money after bad: CalPERS and the crisis in venture capital

Max Whittaker/Getty Images

The California Public Employees' Retirement System (CalPERS) building in Sacramento. The fund has billions invested in venture capital and other alternative asset classes.

VC-Returns-Kauffman

The performance of VC has been poor sine the the mid-1990s.

Smaller-VC-Kauffman

In VC, smaller funds outperform larger ones.

VC-Big-Kauffman

Big VC doesn't meet outsized return expectations.

N-J-Curve-Kauffman

The "N-curve" is in blue and red. The "J-curve" is in green. In VC, you expect J, but you actually get N, with most returns coming early, rather than late.

Institutionalization-VC-Kauffman

A healthy VC ecosystem? Not really. Most of the money is going to fewer funds.

VC-Fees-Kauffman

Are VCs really all about raising money and charging fees? The Kauffman Foundation blames itself for creating this compensation structure.


Pretend, for a moment, that you’re a computer science student at Stanford University. Chances are good that you’ve thought about taking your degree — or even not waiting to get your degree — and starting a technology company.

It’s the new American Dream. It attracts the most talented international students to our major research universities. It’s made the likes of Jerry Yang, Sergey Brin, Larry Page and, more recently, Facebook’s Mark Zuckerberg and Instagram’s Kevin Systrom (both under 30) multi-millionaires if not multi-billionaires nearly overnight.

Technology. The Internet. Mobile. Innovation. Disruption. Entrepreneurship.

These are the things that make America great in the early 21st century. Many of these new businesses are located in California. And they all have one thing in common: They live and die based on the investment decisions of venture capitalists, arguably the most important reallocators of wealth in the global economy.

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Why big venture capital is failing badly

Paul Sakuma/AP

Facebook co-founder and CEO Mark Zuckerberg poses at Facebook headquarters in 2007. The company has since become a rare great investment for big-time venture capital.

The Kauffman Foundation has released a new paper about the state of its own considerable historic investment in venture capital funds. The title, "We Have Met the Enemy...and He Is Us," says it all about the key revelation: that as an investor, Kauffman has made a terrible, terrible mistake putting money into VC. The foundation, which is endowed to the tune of $1.85 billion, is blaming itself for the sorry state of its VC returns, which have fallen off significantly from their 1990s highs. And it's demanding changes in the way that investors approach VC:

The data we’ve reviewed in this paper demonstrate that VCs are good capitalists. They act in ways that are consistent with maximizing their economic profits. [Investors] seem to be less-good capitalists, because they repeatedly fail to negotiate key economic terms that have a significant impact on their investment returns.

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