Breaking down our 66% net IRR
Today, we’re delighted to announce Brightspark’s 10 year performance of 66% net internal rate of return (IRR).
Because Brightspark as a VC firm has taken a few different forms in the last 10 years - two “traditional” funds and a new model of investment featuring single purpose funds - it took a little bit of elbow grease to calculate a net IRR we were confident was fair and transparent. Here’s a breakdown of our approach.
We decided to look back at our last 10 years for a few reasons - the first being that this timeline has a decent amount of actualized data needed for this type of calculation, and because we think that it’s representative of the quality of our investments. All the companies included in the calculation were diligenced by Brightspark’s current investment team and Partners (Mark and Sophie) with the same level of discipline and involvement post-investment. We can say with confidence that a 10-year timeline adequately reflects the quality of our deal flow, and our ability to grow an early-stage investment into a return.
The 66% IRR calculation includes all investments made by the Brightspark team since 2007, including the ones where some capital was lost. Out of the 10 companies included, 4 were portfolio companies in Brightspark Ventures Fund II (2005 vintage), 1 company was founded and operated by Brightspark partners, and 5 are companies from Brightspark's new model. We calculated the net IRR as if all investments would have been made based on our new model of 15% carry and 1.5% management fees for 3 years. This makes for a fair apples to apples calculation across all investments.
When benchmarked against other VC returns, Brightspark’s IRR is soundly positioned in the upper quartile. The top decile of 10 year old funds according to pitchbook returned an average of 32%, the top VC average IRR in the last 10 years is 10.6%, and the S&P 500 returned 7.93%.
Now, a question we anticipate is: “How can your returns be so high?”.
The real, underlying question is actually: “Is this return based on a single home run and a bunch of loser investments, or is this an actual track record?”. The answer is the latter - in the last 10 years, we have had multiple exits creating positive returns for investors. Specifically, 30% of the Brightspark portfolio companies have generated 10x+ the invested capital, 30% have generated 1-3x the invested capital, 30% got the invested capital back, and 10% represent partial or full loss of the invested capital.
While Brightspark’s “new” structure of investments slightly differs from our traditional funds, the deal quality, due diligence, and post-deal work is the same. If we only include the 5 companies we have invested in since 2013, we get a 33% net IRR. It’s important to note that all of the investments included in this calculation were made in the past 3 years - so most of them are still constant at 1X the capital. In VC, most portfolio companies stay constant at 1x the capital until a significant event occurs such as refinancing or exit.
Finally, we would be remiss not to remind investors that VC returns take many years to fully play out, and this early data should not be viewed as definitive given the inevitable ups and downs still to come. It typically takes startups 4-7 years to see an exit through IPO or acquisition, and it may take even longer. That being said, we think that our returns are a strong indication of the quality of our investments. It’s safe to say that Brightspark deals are equivalent - if not better - than the insider access most VIP investors get in Silicon Valley and worldwide.
The benchmarked data reflects net multiples and net IRRs for the vintage year displayed, updated as of the date of the most recent Pitchbook data and the Cambridge Associates VC Index report (September 30, 2016) . We cannot guarantee that they are accurate. Investing in startups is risky, read our full disclaimer here.
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